4 Ways to Increase the Value of Your Business
Many business owners want to eventually exit and sell their business and maximizing the value their business can make all the difference for increasing the odds of a sale and increasing the amount a business owner receives. Below are four ways business owners can increase the value of their business:
Increase the Ratio of Recurring Revenue to One-Off Revenue
Prospective buyers love recurring revenue for obvious reasons. It reduces their risk on the purchase by providing a more sustainable outlook. It's also easier to conceptualize in a business transition. This is one of the reasons many businesses have adopted a subscription model. One-off revenue may be removed in a valuation analysis.
Reduce Dependence on Key Personnel
The next risk that impacts the value of a business is uncertainly surrounding key personnel. What would happen if this person leaves? If there is a potential impact to the business, it will be factored into the value of your business. The goal should be to reduce this dependence through well documented roles and other strategies.
Improve the Stability and Predictability of Cash Flow
Similar to increasing the recurring revenue of a business, improving the stability and predictability of cash flow will increase the value of the business. This may include better matching of the cost structure to the revenue being earned.
Reduce Dependence on Top Customers
A high customer concentration can often impede a business from selling as a prospective buyer will always ask "what happens if I lose customer 1 and customer 2"? If the answer is a dramatic change in the business, then this will discount the value of the business. However, if customer 1 may provide for significant upside in earnings in the future, then this may not completely hold true. In general, though, a more diversified customer base would increase the value of your business.
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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.