Frequently, we are asked about the easiest and most effective ways that owners can optimize the value of their businesses. While valuing a business is not an exact science, and often value is in the eye of the buyer, there are some very essential things that a prospective seller can do to assure themselves of a fair and reasonable valuation and deal terms.
While the information provided here is by no means exhaustive, it is all quite valid and will result in a higher valuation for the seller. Let's start with some very basic strategies that create or enhance the value of a business:
Written contracts - This is perhaps the most rudimentary thing a business owner can do, but surprisingly is sometimes overlooked. All important relationships of the business should have the terms and conditions of that relationship defined in writing. That applies to carriers, suppliers, vendors, licensors, producers, key employees, clients (Broker of Record letters), loans, benefit plans, ESOPs or stock grants, and so forth.
Written contracts are the glue or fabric of the business. They are what define and hold together the important relationships that create the value. Without them there is no evidence of good relations or goodwill with third parties. Think of all the important relationships that your business has, and then check your files to make certain each has a current, valid and binding agreement that both parties have executed. Don't allow this basic step in due diligence to adversely impact your business valuation.
Improved customer retention - Prospective buyers are often most interested in the customer base of your business, and in particular, those customer relationships that are long standing. That increases the annuity that will be generated by your asset post-transaction.
It also provides the buyer a base for business development and sales initiatives involving cross-selling and up-selling activities during any earn- out period. Improved retention will dramatically increase the lifetime, net-present value of your customer relationships, a benchmark that many astute buyers will look at. So, if you have not focused on improving your retention of customers, perhaps now is a good time to implement several strategies to achieve this goal. If done correctly, the action plan will more than pay for itself in new business and referrals.
Multiple marketing strategies - From a buyer's perspective, a business that employs multiple marketing strategies is more desirable since the firm is not dependent on just one method to grow its customer base. Tangentially, creating multiple sales channels (direct, through intermediaries, worksite, affinity groups) is equally important. Ultimately, this approach will result in greater revenues being generated and safeguard your profits and asset value from erosion due to a downturn in a particular market sector, customer group, or sales channel.
Finally, choosing sales channels that result in lower customer acquisition expenses (ex: worksite marketing), will also boost your profits and your overall valuation.
Leveraging technology - Deploying the right, smart technology solutions in your business can increase productivity, reduce expenses, improve profits and, in some cases, actually help to generate more revenue.
Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at firstname.lastname@example.org.
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