Four Ways to Increase the Value of your Business
Building a business from scratch takes dedication, sweat, and some occasional tears. Besides a paycheck and creativity, what should be our end goal?
To sell (or pass on) your business!
More specifically: what is your business worth to a potential investor or buyer?
Even if you aren’t looking to sell your business any time soon, it’s important to grow and know your business worth, so you invest smartly and efficiently, ensuring your future nest egg is as valuable as possible.
The bottom line? Your existing revenue, services, customer lists, brand reputation, inventory, and recipes have a dollar value! Don’t believe us? Consider this - many entrepreneurs buy existing businesses instead of starting from scratch, because #marketingishard.
How to Increase the Value of your Business
As you actively manage and grow your business, ensure you’re treating your company like an asset that if nurtured properly, will grow in value. Your business is comparable to stocks, personal investments, or your home - it should grow over time and provide you with future retirement income.
So how do we increase the value of our business? We’ll be using these words frequently, so let’s get the vocabulary out of the way:
Asset = a useful or valuable thing
Valuation = an estimation of something’s worth
Cash flow = the total amount of money being transferred into and out of a business
1) Grow Cash Flow & Expand Profits Each Year
Cash flow and expanding profits each year is king (or queen #feminism) to increasing the value of your business. If you can show you’re growing cash flow AND profits, that will lead to a higher valuation based on potential alone.
In its simplest form, valuations are all about future earnings.
If someone buys your business, they care about what future money the operations will generate.
Small earnings leads to a lower valuation, while high earnings lead to a higher valuation. Invest in creating year-over-year profitability growth for your company, even if you aren’t looking to sell your company any time soon.
Looking to sell your business soon? Find ways to immediately grow your revenue (or conversely, decrease costs without impacting revenue). Showing earnings growth for 2-3 years leading up to sale of your business has the largest impact on business valuation. This shows your business will most likely continue to grow in future years.
REMEMBER:
Potential has a value. Potential is why Tesla is valued higher than Ford.
2) Do Today What Will Make you More Valuable Tomorrow
Invest in your business wisely. Your goal is to continually add value.
What does added value look like? Creating email /customer lists, solid business / financial plans, social media followings, and a functional website are examples of value-added business investments. Value-add investments encourage people to pay more for your business, as they intrinsically benefit operations and sales.
Invest in:
Your brand
Your customers and their reviews
Your product, trade secrets, recipes, etc.
Processes & strategies
3) Diversify Income Streams
Having multiple sources of income for your business, across multiple product or services, can increase your business valuation. Why? It diversifies the source of income, meaning you have more opportunities to increase margins and less risk if certain items or products go out of style.
Diversification isn’t only for product offerings, however. Diversify your purchasing channels, too!
Can you sell your products in-store, online and via a third party? Diversifying your channels ensures you’re not overly exposed to a single source of income and allows you to prepare for shifts in consumer preferences.
4) Create Processes to Highlight Efficiency & Quality Control
If your salesperson Susan is the only reason clients visit the shop or you have a trade secret that only exists in your brain (and not on a piece of paper), you’re creating an inefficient operation that can’t be replicated by an incoming partner or business owner.
We all have people and products that make us unique, yet it’s our job to ensure we create processes and efficiencies that allow us to broadly replicate our success. Even if you aren’t in the process of selling your business, processes help us train new employees, ensure our customers receive a perfect Customer Experience, and save time / money!
If quality cannot be replicated or taught to another, that presents challenges. We’ve all experienced this but might not even realize it!
Think of your favorite restaurant that switched ownership. After the management transition, the food & experience may have changed so much it feels like a completely new restaurant! That’s because there weren’t strong processes or efficiencies in place to allow staff and products to maintain high levels of quality control.
It’s important to create processes and be able to pass along skills to employees to ensure a single person is not too involved with running the business. Ask yourself - if you removed yourself or a key employee from the day-to-day, would the business be able to function?
In Summary
These four actions will help you optimize the value of your business. Stop thinking your business is only as good as the income it provides and consider the asset or nest-egg you’re building that could be sold in the future. When you take this longer-term view of your business, the importance of strategically growing and planning ahead for the future becomes clear!
And heck, Corporate America is obsessed with value-added activities and we think it’s time small businesses take that same approach!