Business Owners

Building the Value of Your Business

Caught up in the day-to-day issues involved in running your business, you may not be thinking much about how much your company could, ultimately, be worth when the time for a transition arrives. But the choices you make now, both large and small, can add to or detract from the future value of the company. While changing market conditions will demand flexibility, your exit plans should inform your current growth strategy.

There are many ways for a company to grow, including entering new markets, developing new products, acquiring complementary businesses, hiring more employees, and increasing sales and marketing expenditures. An owner may attempt to grow the business rapidly by tapping into outside financing or to expand organically using the company’s own revenues. With so many strategies to consider, you should develop a long-term plan to guide your business as it grows.

Your decision regarding the ultimate disposition of the company will influence what business form you choose. It may, for example, make sense to opt for a C corporation structure for a business that may go public or an S corporation form if a private sale is planned.

Transferable Assets

Work on building and maintaining transferable assets. These may include not only property and equipment, but also intangibles, such as a customer base, a solid reputation, brand recognition, and business processes. Depending on the type of business you operate, your firm’s intangible assets could prove to have substantial value at the time of transition. Distinct intangible assets include copyrights or trademarks, proprietary lists of customers or prospects, and long-term contracts. The value of the business in excess of the owner’s equity is known as goodwill; this may include assets such as an attractive location or customer awareness.

Companies also derive intangible benefits from having a strong management team with the knowledge and connections required to maintain the business after the owner retires. In many cases, having a skilled and loyal workforce can also be considered a transferable asset in a sale.

Financial Performance

When growing your business, your goal should be to establish a self-sustaining enterprise with steady revenue growth. The financial performance of a company is often measured by its free cash flow, or the cash that a company generates before interest, taxes, depreciation, and amortization minus capital expenditures. In assessing the value of the company, a buyer may, for example, project a company’s earnings over the next five years based on the current cash flow. This projection will take into account any outstanding debt, as well as whether revenue growth and margins have a history of consistent growth.

Regardless of your time frame for transitioning the business, you should review regularly the products and services your company offers. Businesses are often more efficient when they focus on their core competencies, rather than diversifying too broadly. If your company has product lines or offers services not closely aligned with the firm’s core business, consider whether these areas are profitable or represent a drag on the company’s resources. Selling off non-core assets may also be a useful means of paying off debt.

You may also want to restructure agreements or contracts that may be objectionable to a potential buyer, such as a long-term lease, licensing contracts, employment contracts, and loan agreements. On the other hand, you may need to formalize verbal agreements to ensure the business’ relationships with key customers or suppliers continue after the transition.

Plan ahead before you sign a lease. Long-term leases are an asset provided the terms are favorable, the location is suitable, and the size is right. If, however, the company is likely to grow out of its facilities before the lease is up, or if potential buyers may want to move the firm’s operations, a short-term lease may be more appropriate.

If you want a more detailed analysis of your company’s value, call in professional business appraisers familiar with your industry. Even if you have no immediately plans to leave the company, an estimate can help you identify ways to maximize the value of the business in preparation for a future exit.


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