64 Ways to Increase and Enhance Reviewed by Momizat on . the Value of a Business Buyers look at earnings as a primary driver of value. There are many other factors such as strategic value, competitive position, brandi the Value of a Business Buyers look at earnings as a primary driver of value. There are many other factors such as strategic value, competitive position, brandi Rating: 0
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64 Ways to Increase and Enhance

the Value of a Business

Buyers look at earnings as a primary driver of value. There are many other factors such as strategic value, competitive position, branding, secret processes, and cost to duplicate. There are also many other factors, some not so evident or obvious, some intangible and some in the “good feelings” attitude about the business or its prospects. At the end of the day, it is sometimes hard to pinpoint exactly what made the difference for the buyer to close on the transaction. This article presents 64 items that can either increase or enhance a business’ value, or in the absence of them, decrease the value.

64 Ways to Increase and Enhance the Value of a Business

Buyers look at earnings as a primary driver of value. There are many other factors such as strategic value, competitive position, branding, secret processes, and cost to duplicate. There are also many other factors, some not so evident or obvious, some intangible and some in the “good feelings” attitude about the business or its prospects. At the end of the day, it is sometimes hard to pinpoint exactly what made the difference for the buyer to close on the transaction. Here are 64 items that can either increase or enhance a business’ value, or in the absence of them, decrease the value.

  1. Increase profits. Always good.
  2. Increase cash flow. Always important but cash flow is usually reduced when a company is profitable and growing rapidly, so this metric needs to be used along with many of the others. It is not a one-off.
  3. Increase free cash flow. This is cash flow from operations less payments for fixed asset acquisitions. This provides the amount available from operations that could be distributed to owners, pay down debt, and leave funds available to invest in the business for infrastructure, marketing, innovation, or growth.
  4. Increase sales. The rate of increase is also important as well as the trend.
  5. Increase margins or maintaining stable margins. Always important. Dropping margins is not good but that might not be avoidable. Any negative change should be explained in a memo, even if the change was your fault. This will usually be noticed and questioned, so it is better to present the reason before the question is asked. Some people feel they do not want to call attention to the negative, but in the case of value creation or protecting the value, a small negative could affect the business’ value in a big way. Also, by being up front it indicates that you are on top of things, in control, are working on solutions, and are trustworthy.
  6. Identify drivers of future growth that you were not able to yet capitalize on. Perhaps due to limited working capital, borrowing capacity, time, or lack of other resources. Drive the investment thesis and narrative.
  7. Separate sales into product lines or customer groupings and measure each line and group separately.
  8. Identify product or services lines that have continuous renewals or follow a subscription model. These usually have value separate and apart from the rest of the business.
  9. If you have a product service arm as part of a product sales operation, and the aggregate service revenue is substantially less that the sales portion, consider carving this out and showing it separately. While there might not be service contracts, the pattern of repetitive sales can be tantamount to an informal subscription model. This could also be separately valued and might command a higher multiple due to the predictability of that revenue and cash flow stream.
  10. Understand your different profit centers and the margins for each. Use the previous item as a sample of the value of this.
  11. Understand and identify your profitability by customer. Sometimes your noisiest and neediest or even your friendliest customers are your least profitable. This shows an emphasis on quality of sales, rather than quantity. What you do with this information is a function of how you run your business. However, segregating these customers and providing this information is a good start. Point to keep in mind is the “family tree” resulting from some of these customers. A very unprofitable and small customer might have been responsible for you getting introductions to your two largest customers. Know your numbers—all of them—and share them with a prospective buyer.
  12. Evaluate and quantify the profitability of your largest customers and determine what they add to the bottom line. At one point it might have made sense to have a very large customer or two to capture a greater sales volume to absorb some overhead or maybe a better price from a vendor. Nowadays with the technology many companies are using and the ability to run leaner and more agile operations, this might not be as valid. It never hurts to review this. Also, by dropping a large volume customer with very low margins, the overall company margins will increase without affecting profitability too much, if at all. This has many pieces and warrants a look. A value adder is a key “name” customer that has a limited number of suppliers for specific products and where a buyer would want to have access to that customer.
  13. Group smaller customers and treat them as a separate profit center. For instance, eight small customers combined would create a more meaningful profitability and cash flow center than each one by themselves would. Then compare the aggregate numbers for this group with single customers that size. Sometimes this creates revealing actionable data. Again, the more positive data that is provided to buyers, the greater the potential to add to the overall value of the company.
  14. Decrease overhead, but not to the extent that you would lessen effectiveness or efficiency. Demonstrate how you have “right sized.” Doing something positive does not mean that it should be looked at separately. Show and tell about it.
  15. Decrease debt. This usually does not factor into the value, but too much debt lessens the business’ value since the buyer will need to come up with more cash or their own debt to acquire and then operate the business.
  16. Increase debt. Leverage should be used to grow the business. Short term borrowing will smooth out peaks and valleys in cash flow. Long term borrowing will provide funds to grow the business by adding product lines, inventory, a bump up in accounts receivable, perhaps expanded facilities or equipment and warehousing, increased marketing or advertising, creation of a website or intellectual property or proprietary products and branding. When borrowing, try to justify it by calculating a return on the investment and the loan.
  17. Get timely and accurate financial statements. This is extremely important to a buyer and speeds the delivery of current information helping the negotiations.
  18. Understand your balance sheet. This indicates the liquid assets such as accounts receivable and inventory, and current liabilities like accounts payable. Working capital and debt to equity ratios are important in evaluating a business, so focus, pre-going-to-market, on increasing receivables and inventory turnover. Reduce accounts receivable past due amounts. Consider how your inventory could be reduced. Consider selling obsolete inventory for whatever you could get; it is not like fine wine that increases in value as it ages. See if your vendors will hold your inventory for you and only bill you when it is shipped. A “just-in-time inventory system” increases inventory turnover as previously mentioned.
  19. Develop a five-year growth plan. Whether you use it (you should) or not, this can provide information that could have a buyer increase the price for your business because it is part of your growth narrative.
  20. Implement the growth plan. Just get started. Sometimes small steps morphs into an inveterate march.
  21. Develop a strong web presence that is professional, attractive, and easy to use. Invest in search engine optimization (SEO) and robust metatags to build organic search position placement. Provide useful information to customers and prospective customers which is searchable and that will drive traffic to your site. How-to or explanatory videos increase your organic search position and makes your site the go-to place for information related to your products. That is how you can increase web-based sales. High visitor count and engagement has a positive impact on valuation because a buyer may view this as potential for greater sales if fine-tuned. This is where the action is nowadays in case you have not noticed.
  22. Depending on the products or services you sell, consider how to reach Millennials with a message that will resonate. This is the largest generational group. Many are concerned with the positive social impact a business makes, are more interested in experiences, different natural foods and artisan products, and uniqueness. What worked with Baby Boomers does not necessarily work with Millennials. A business that understands how to appeal to Millennials and what makes them tick has great value to larger, more mainstream businesses. You also must reach Millennials through an active social media program.
  23. Be digital and develop virtual capabilities. This might not add value, but because it is expected, would decrease value if you are not on board with it.
  24. Establish a brand that endures, that drives profits, sales, and/or margins. Sometimes small strategic investments in this regard add exponential value to a business. Invest in a logo, promote your brand and back it up with a culture that your customers and potential customers connect with or aspire to and that gets buy-in from all your team members. Walk the talk!
  25. Increase product or company visibility. This can be done many ways. Some are with advertising, publicity, experiential events, social media presence, and “working” your social media and SEO.
  26. Bad social media comments can hurt the valuation. Positive comments will not add value but will create a good feeling about the business. Always respond to negative comments in a positive, non-hostile way, and quickly. Thank all customers for commenting, especially those with positive comments.
  27. Have better empowered and responsible employees. Train in technical as well as customer facing skills, and work at strengthening your culture.
  28. Prepare an organization chart and then really look at it. One technique to use is to have each manager prepare an organization chart and then compare these to what you think it should be. Do not be surprised at the differences and real lack of clear lines of responsibilities. It is your doing. However, recognizing the reality; fixing it can only increase a company’s value.
  29. Be a better manager. Be a manager! Delegate. Empower your people to be entrepreneurs. Create opportunities for your personnel to grow. Leverage yourself. Do not micromanage; you have better things to do with your time. A business’ value increases as the work the owner or manager does increases in its effectiveness.
  30. Focus on growth and meeting your “numbers”. Use daily key performance indicators (KPIs) or dashboards, weekly financial data, and monthly financial reports. Track what is important to your business. Shorten customer order backlog and reduce your work in progress inventory. Maximize your sales to your existing customers by finding out what products or services they buy elsewhere that you could provide to them. Get a bigger share of your customers’ spending.
  31. Remove uncertainty which is perceived as a valuation lowering risk. Strive for and demonstrate a predictable business. Show how you have accurately predicted your business with prior quarters or years variance to budget.
  32. Establish strong internal systems and controls. You must have tight controls.
  33. Set up firm-wide procedures that can easily be taught and where others can fill in if necessary. Have more checklists and more directed and focused training.
  34. Reduce production backlogs and areas of constraints.
  35. Demonstrate an ongoing capability of continuously reducing your product costs. This is accomplished through better sourcing, engineering simplification, improving plant throughput or better grouping of orders to maximize buying power or production efficiency.
  36. Increase sales per customer or average order size. If you sell a product, try to add on a service contract and an extended warranty when manufactures’ warranty expires. Keep track of warranty expiration dates. Track optimal customer reorder times.
  37. Identify customer requests for services or products where you refer them to another vendor or source and show how much revenue would be captured by adding that service or product to your company, and the cost and effort it would take.
  38. Partner or collaborate with suppliers or customers to develop new products or uses. Help customers increase purchases of your products. (This is a recurrent theme, and it works if it is worked at by you!)
  39. Make sure your equipment is well maintained and in good repair.
  40. Have a neat and clean factory, warehouse, or back office as well as a customer facing facility. Neat does not add, but messy will cost you.
  41. Prepare a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis and then follow through on critical points that are raised. Show a buyer how you have mitigated weaknesses and threats while maximizing your strengths and opportunities.
  42. Try to resolve any environmental issues or head off actions that might cause problems or violations.
  43. Develop an environmentally friendly, green sustainability policy. Become aware of vendor sourcing and make this an issue. This does not need to be done as a revolution, but it needs a start and a plan to be a better business citizen. Your customers, especially Millennials, will appreciate your effort which builds brand loyalty.
  44. If there are intercompany issues, try to resolve them and certainly document them fully and properly.
  45. Resolve pending or potential sales and use tax issues, and payroll and income tax issues or inquiries before going to market.
  46. Review independent contractor arrangements to make sure there would be no employment tax issues later. Resolve current labor issues.
  47. Review long-term contracts for unwieldy or stifling encumbrances.
  48. Do not lose major or longtime customers. This sounds like a foolish comment, but this can have a much greater effect on your company’s value than the profits lost from these customers. Remember to think value enhancement.
  49. In preparing for the lead up to a sale, seek to diversify your customer base to reduce reliance upon a single or very small number of accounts. No account should be more than 20% of your business. Such concentration is a risk. Sometimes this cannot be helped, but you can still try to work at it.
  50. Lower employee turnover. High turnover will cause a reduction in selling price.
  51. Lower customer turnover. Try to never lose a customer. Assemble a listing of your 5 or 10 largest customers over the previous five years and try to determine why some dropped off that list and how the new ones were added.
  52. Short term leases that are easily renewable and cancelable are a plus. This will not add value, but long-term leases could cause a reduction in the value. Conversely, a long-term lease at favorable terms reduces risk and adds value. This could be complicated, as all the items on this list, but with valuing a business, everything counts.
  53. Being in an industry that is growing rapidly is a plus.
  54. Being a leader in your segment is a plus. Being a “follower” will not reduce the value, but being the leader adds. For that reason, being active in industry and trade associations can add value. This is important and keeps you in touch with what is going on in your industry.
  55. Having a good location if you are a retail business or if you need to draw on a pool of skilled labor.
  56. Being a union shop or not being unionized. This is a company-by-company or industry-by-industry issue and depending upon that, could be a plus or minus. If unionized, then stable, solid, and upfront relationships with the union is an asset. If not unionized, efforts to develop and maintain strong employee relationships and fair working policies and conditions is critical. However, this is also necessary if you are unionized. This also ties in with the buy-in to your culture.
  57. Having a succession plan with potential new leadership able to step up will add value. Conversely, not having this may reduce value since it indicates that you are a “one person show.” Most buyers are prepared to step in as the operator, but they want to know that there is home-grown support.
  58. Not having a buy-sell agreement will hurt the valuation. While it will not matter once the transaction is completed, it is an indication of a lack of attention to smart business practices and attention to detail, and adds to the buyer’s risk.
  59. Having a dearth of lawsuits. Avoid being a defendant but being a plaintiff too often indicates you are litigious. Buyers do not like to deal with sellers that are quick to sue.
  60. Long time favorable professional relationships with accountants, attorneys, insurance agents, consultants, bankers, and others you talk with.
  61. Having an informal board of advisors. I find it hard to imagine this not adding substantial value after at least a year of quarterly meetings. Whatever the cost, this is an investment in the business’ future. Also, this may be an attractive aspect to a buyer if they are not a strategic buyer and are looking for industry expertise.
  62. Try to head off any inkling of governmental intervention, anti-trust claims, diversity or inclusion issues, or professional ethics or licensing problems.
  63. Anticipating and mitigating risk should be ingrained in your modus operandi. That shows a buyer you have been vigilant and “skeletons in the closet” are less likely.
  64. Being in an industry that is part of a roll up can add value, especially if you are an important cog in that wheel.

This is comprehensive and is not complete as each deal is different and no matter how experienced the appraiser or buyer is, there are always new issues that arise. Use this list as a starting point.

This list can also be used by any business as a guide to best practices. Either way, sometimes small changes can breed huge results.

Edward Mendlowitz, CPA, PFS, ABV, CFF, is emeritus partner with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York, and is one of Accounting Today’s 100 Most Influential People. He is also an adjunct professor in the Fairleigh Dickinson University MBA program. The author of 29 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters, and presented over 350 CPE programs. He writes a twice a week blog at www.withum.com/partners-network-blog.

Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to emendlowitz@withum.com.

Henry R. Mandell, CPA (inactive), MBA is a collaborative partner based in Los Angeles. He helps ownership and management focus on what is important to drive value, tighten controls, and improve profitability. He has been a CEO, COO, and CFO, with over 35 years in the apparel, technology, entertainment, and consumer products/CPG spaces. He knows the concerns and challenges leaders face and what it takes to drive success. More importantly, he understands the bottom line and how to unleash real value from a business. The common thread to his diversified experience is that it has been in dynamic, fast-paced entrepreneurial environments. He has a solid track record of effecting operating efficiencies, turnarounds, profitability enhancement, and organizational change in middle-market companies and in challenging business environments.

Mr. Mandell can be contacted at (818) 399-3626 or by e-mail to hrmandell@yahoo.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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