05 Sep Ten Factors That Can Increase the Value of Your Business
If you are considering selling your business, look at your company from a buyer’s perspective. Improving your performance in ten areas that are critical to a buyer increases the value and leads to a higher price and better deal terms for your company.
- Customer Retention and Diversity: Buyers will evaluate the retention and churn rates of your customers and the revenue tied to each account. The most attractive companies have 90% or greater customer retention, with no customer amounting to more than 10% or 15% of revenue. If your business falls short of these metrics, you should work to improve retention and customer diversity to increase your value.
- Management Depth: A buyer will look at the quality and retention of the management staff and employees as a major factor in deciding whether to buy your company. Ideally you should have a strong “second in command” or successor in place for a year ahead of your scheduled departure date. If you have a strong management team, try to implement employment contracts, non-compete / non-solicitation agreements, and some type of equity participation to keep these stars involved through the transition.
- Contractually Recurring Revenue: Buyers are attracted to companies with predictable cash flow. Revenue from annual contracts, licensing fees, and other recurring revenue are more powerful value drivers than projected sales revenue from other sources. Your recurring revenue stream mitigates the risk to the buyer and demonstrates the sustainability of your business.
- Proprietary Technology and Intellectual Property: IP is one of the strongest barriers to competition and the secret sauce for which some buyers are willing to pay a premium. When it comes to IP, all buyers (and companies) have three choices: buy, build, or partner. IP may include copyrights, trademarks, patents, or unique processes.
- Demonstrable Growth and Scalability: All buyers project various growth scenarios before making an acquisition. Your historic growth results get you in the game, but buyers care most about what happens with revenue and profits after the acquisition. The ability to grow quality revenue streams such as recurring revenue demonstrates the maturity of your marketing and sales process and the durability of your company. In addition to seeking confidence in your growth prospects, most buyers will look for scalability, that is, can you add customers and revenue in a cost-effective manner, without burning out your employees or dissatisfying your customers? SaaS, cloud, and MSPs are leading examples of scalable business models that can increase their profit margins as they grow and may provide platforms for additional acquisitions. Platform companies that are growing at 15% or more per year typically sell at higher values.
- Gross Margin: Gross Margin Percentage is one of the most important lines on your income statement and that is how buyers measure how efficiently you make money. Most companies should aim for a gross margin of 50% or more, with the ability to maintain or increase the margin while growing revenues. Buyers will evaluate the consistency of gross margins over time to understand how much of every dollar can flow to the bottom line. A consistently strong gross margin demonstrates the quality of your revenue and your pricing model compared to your cost of sales.
- Robust Systems and Accurate Records: Modern, effective information management systems and accurate records will reduce the buyer’s perception of risk. For example, you should keep your books on the accrual basis according to Generally Accepted Accounting Principles (GAAP). Reviewed or audited financial statements by a reputable CPA firm will further increase your credibility and a good outside attorney and other advisors reduce the risk even more.
- Brand and Reputation: A well-defined brand includes your company name, logo, colors, web and social media presence, messaging, mission, and vision. Your reputation is based on what your customers, employees, suppliers, and business partners say about you. A strong brand takes years to develop and can enhance the value and attractiveness of your business. Another way to burnish your reputation is to encourage your staff to speak at industry events, publish articles, and interact with industry reporters.
- Product and Service Diversity: A smaller company that has a portfolio of high-quality products and services but lacks adequate marketing and distribution can become a valuable asset in the hands of a strategic buyer. A narrow set of offerings, however, may increase risk and drive down your value for some potential buyers.
- Actionable Growth Plan: Sellers need to be ready to present a growth plan of actionable and justifiable ideas to potential buyers. The plan should consider additional customer segments or verticals, geographies, products, or services. The seller should understand the potential size of the market, which markets offer the best margins and growth opportunities, potential obstacles, and investment requirements. Documenting these opportunities can make your company more attractive and add to the purchase price.
When it comes to increasing the market value of your company, the revenue and profit numbers often set the range of possible values, but where you end up in that range – or whether you can achieve a premium above the range – is strongly influenced by these ten factors. When you sell shares of a public company’s stock, the market price is clear. But the market value for privately-held businesses is imprecise and more subjective. There is plenty of room for interpretation so getting a positive response from the marketplace can lead to a much better outcome when you decide to sell.
