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December

11th

2019

The ultimate list: 25 factors that will dramatically increase business value – and 5 that will bring it down

By

When it comes to selling your business, you naturally want to get the highest price possible and reap the rewards for your years of hard work and dedication. But with one eye on exciting new horizons, it can be easy to miss some of the factors that will increase business value and bring in that top market valuation.

This article examines some of those factors and explains how they contribute to maximising your company’s potential. It also aims to provide some perspective and clarity on what potential buyers are looking for. This will make sure you’re not just meeting, but exceeding their requirements when it comes to selling your venture. 

Start with the basics to create a strong foundation for increasing business value

Basics of Building Business Value

1. Strong marketing strategy

Your marketing strategy should demonstrate proven, traceable results and an appropriate budget that is tied back to expected sales and growth targets. Your business will also increase in value if you have automated systems in place to predict demand and allow you to cash in ahead of the curve.   Have a plan.

2. Proven conversion funnel

Having a stable source of new leads will make your business irresistible to buyers. Ensure that you can show a consistent pipeline of marketing activity, leading to first contact, appointments and clients with respective metrics and conversion rates. This will demonstrate solid, longer-term growth prospects and make your business much more desirable to potential investors.  Have a system!

3. Stable industry

Buyers will pay a high price for stability. The value of your business will increase if your market is stable and you are shielded from potential changes in employment, tax or trade laws.

Thinking on an international level, do you sell to or import from countries that are likely to face sanctions or trade with volatile areas that may experience civil unrest or even outbreaks of war?    

On a local level, education and care sector businesses can be seen as risky when you are unsure what future legislation changes can involve. Similarly, industries reliant on fossil fuels are likely to loose ground to renewables unless they can adapt.

4. Technology that drives efficiencies and cost-savings

Your business will increase in value if you use the latest technology to cut costs and improve overall efficiency. This could include Customer Relationship Management (CRM) or Computer Aided Design (CAD) software. These will help automate your sales process and make your design more powerful respectively. Other ideas include collaborative working and cloud technology. Make sure to have the appropriate technology to back up and protect all data from loss and cyber attacks.

5. Fully protected intellectual property

Use the law to fully protect your original product, service or concept. Other companies should not be able to reproduce it without your agreement. How you do this will depend on your business. Options include patents, copyrights, non-disclosure agreements or digital rights management systems.

Fully protected intellectual property will bring peace of mind to prospective buyers and demonstrate that your company has a long-term, unchallenged revenue source.  Without the proper protection in place, your business could lose its unique selling points and face heightened competition.

6. Ability to predict market trends

Show potential buyers that your business can capitalise on emerging trends. It requires an understanding of stock management – so that you can exploit the high demand but are not left with unsold assets when the trend has passed. 

7. Specialising, not generalising

It’s good if some of your products or services are unique to your business. That way, if customers want them, you become the obvious source. Perhaps your business is on a ‘preferred supplier’ list, or has completed due diligence for work on government or public sector contracts. Maybe you have staff that have special qualifications or have completed specific industry-related training courses.

This doesn’t have to be as groundbreaking as launching a world-first product such as the iPhone. Try to carve away a specific niche where you become the go-to expert. Whatever your specialisation, make sure you understand its value to your customers and that it’s communicated in all sales and marketing efforts. This will bring in the highest revenues and increase the value of your business. 

8. Proximity to your customer base

Where relevant, your business should be in a prime location. It should be easily accessible by customers with sufficient disposable income to spend on your products or services. An excellent location on the high street is critical if you are a customer-facing business such as a restaurant, coffee shop or hairdresser.

If your business is part of a supply chain, then it will be worth more if it’s close to major road and rail links – or international air and sea links, if appropriate. It’s essential, however, that you don’t over-reach in terms of spending on rent or property overheads.

Make good financial health a cornerstone of your business 

Financial health for growing business

9. Year on year profit increases 

Your business will be worth more if you can show year on year profit increases. Buyers will look for evidence of increasing sales, gross margin and profitability over at least three years.

Look to sell at a time when you have three years’ constant growth, rather than after a recent dip in sales and profit.  

10. Recurring revenue models

Buyers like the idea of predictable income, so if your business operates a recurring revenue model or has an active subscriber base, they’re likely to pay a higher price. Buyers will want to see evidence that customers rarely cancel their contracts outside of their minimum terms and that renewals nearly always take place. 

You should also demonstrate proactiveness in renewing agreements ahead of expiration. For businesses that don’t operate a subscription-based model, it’s great if they are able to show that customers routinely make repeat purchases.

11. Contracts

You’ll increase the value of your business if your customers have signed contracts – and if all the contracts are up-to-date. Those owning the client relationships should know when contracts are due to expire and proactively talk with customers about renewals. A high rate of client renewal gives buyers confidence. If your staff have the autonomy to service clients without reference to you for every detail, retention often follows.

Whichever contract you use, ensure that it contains a clause that allows ownership transfer upon the sale of your business. If you do not write that clause in the contract becomes worthless when you decide to sell. 

12. Sound accounting and financial systems

Strive to have all your financial and accounting systems automated. This allows access to up-to-the-minute data on your company’s financial position. It also enables financial decisions to be taken with the most accurate information.  

Owners and senior management should review this financial information as part of any new investment, product development and marketing spend decisions. If you own a limited company or are VAT registered, then you should be able to show timely submissions of all required documentation and payments. 

13. Positive cashflow and regular re-investment 

According to the Office of National Statistics, more UK SMEs fail each year due to poor cash flow than for any other reason. So, if you can run your business with positive cash flow – and show documented proof – your business will immediately be more valuable and desirable. Your business will also increase in value if you rarely borrow for day-to-day operations, and you, as the owner, can take cash out of the business without restricting future growth.

14. Strict billing processes

Strict billing processes show potential buyers that they are less likely to incur bad debt or have to write off losses on specific projects. An example would be where work is not undertaken unless customers have paid a deposit. Carry out contract reviews on a regular basis to ensure they take account of the latest legislation and set out a clear payment schedule.

Spread the risk, reap the rewards

Spread risks to increase business value

15. Multiple hubs of responsibility

Businesses that don’t rely heavily on their owner or founder have a higher market value. Potential buyers worry that they wouldn’t be able to replace the personal relationships that you have with staff or clients. They may also find it hard to take on tasks for which you’re solely responsible.  The more personal the involvement an owner has, the less likely it is that processes are formally documented and easily mastered by other people.

Owners that can show that their senior management take most – or all – of the daily decisions will get a better market price. There are also more buyers who want an investment (hands off ownership), than there are buyers looking to replace you and the work you do (working ownership).

To that end, daily procedures and brand values should be clearly written down in a company manual. 

16. Scalable operations

Buyers will be more likely to pay top price for a business that has a scalable model with well-documented processes and procedures.

Heritage businesses that rely heavily on manual or craft labour may be difficult to scale for example. They are often highly profitable due to their niche market and specialist skills; however, it’s difficult to grow these kinds of businesses beyond a certain point.

No matter what type of business you own, look to see if there are ways to automate processes without compromising on quality. That way, new owners will see further potential for growth and your business will increase in value. 

17. Multiple points of customer support

The most robust and successful businesses have various points of client contact. If your client support relies on a single person, there is a risk that if the person is not there, the relationship will crumble.

Introduce systemic processes for dealing with sales, delivery and complaints and get the wider team on board.

Following this advice  will also create a broader skills base within the company and protect it in the long run if client-facing employees leave. 

Staff contracts should also contain strong clauses that restrict them from taking clients to new companies.

18. Broad customer appeal

Businesses will be worth more if they have a streamlined product or service offering that appeals to a large enough target market. While it’s good to target a niche, you should ensure that your niche is viable enough in terms of size.

The ability to cross-sell products or services will also help generate supplemental revenue and increase your valuation.

19. Diverse suppliers

Wherever possible, purchase your supplies from multiple sources or find out in advance where you can quickly obtain similar goods at similar prices. This will protect your business against stock shortages, broken machinery and other unforeseen delays in fulfilling customer orders. It will also offer some security against price increases.

20. Adaptability

You can increase the value of your business by making sure it can adapt quickly to new customer demand, changing markets and shifting economic climates.

For a physical shop some ideas include repackaging goods or services in response to new trends or offering loss-leaders to attract more sales in other products.

Online, services and technology companies can be more nimble as they can adapt more quickly. In contrast, manufacturing companies with a significant physical presence will find it harder to change without much notice.

Consider how fast your company can adapt and, if necessary, set out detailed plans to show such changes could be achieved without impacting revenue streams. This will help prospective buyers to see your business as a viable long-term investment.  

Look after customers and staff

Support customers and staff

21. A clear brand that communicates your value

Your brand is your reputation. Potential buyers will make an initial judgement on your business based on your brand before they even meet you. It’s not just a case of having a good website, a smart logo or smart premises – although all these things do help contribute to positive brand value (and to the value of your business). 

A well-received brand is also built on the quality, delivery, and reliability of your product or service. To be successful, a brand might be a well-respected local business that receives plenty of praise from the surrounding community. A strong brand means that you’ve built up trust amongst existing and potential customers. This will put your business ahead of the competition and, therefore, increase the value when you come to sell.  

22. High customer satisfaction levels

Can you prove that you have – and that you maintain – high customer satisfaction levels? To do this you must regularly measure, document and analyse customer satisfaction levels. Such data can also be used to predict future product trends or understand moments where satisfaction levels dipped. 

You can use the Net Promotor Score, or carry out annual customer satisfaction surveys. Depending on your business, you may receive regular client feedback. Other means include receiving online feedback from third-party sites such as TripAdvisor or TrustPilot.

No potential buyer will take your word for it. If you can show consistently high customer satisfaction levels, you’ll be able to command a higher price for your business when you’re ready to sell.     

23. Positive employee culture

A positive environment is more likely to lead to happy long-standing employees. It could also keep absences and sickness down and even drive innovation. Transfer of ownership is more straightforward if staff have worked in a business for a long time and are happy in their roles and believe in what the business is achieving. They will be able to assist the new owner to a much greater degree and keep the business running as they settle in.

Customers also value happy staff. If staff are relaxed and confident, then, generally, they will be more amiable to customers or clients. If they love their work, they’ll also care more about client satisfaction and go that extra mile.

To achieve positive employee culture, you could offer generous holiday packages, flexible working options and other benefits. Possibly even more importantly, staff will feel happy and motivated if they have clear goals set out, their work is governed by efficient processes and there is effective communication between staff and management. There are plenty more factors for ensuring good staff wellbeing – these are beyond the scope of this article.

Even though positive employee culture may seem, at first, to be intangible, it has a genuine impact on the value of a business.      

24. Prominent and well-managed social footprint

It’s not necessary to have a presence on all social media channels, but the ones you pick should be regularly updated. You can choose from, e.g. LinkedIn, Facebook, Twitter, Instagram, Pinterest or SnapChat. You should post regular positive stories and avoid getting tangled in politics or controversial topics. If you hold staff events or get involved with community projects, make sure you’re talking about them on your social media channels. 

In general terms, the more comprehensive your social media reach, the more your business will be worth. But it doesn’t always work in that way. Extensive social media reach with negative content can be more damaging than no social media at all.

With that in mind, deal with customer complaints on your social media channels quickly, politely and honestly. At the other end of the scale, thank customers that give you positive feedback on your social media channels. Potential buyers will check your social media, and it may have an impact on the price they’ll be willing to pay.

25. Integrity and reputation

In many ways, integrity is one of the most intangible business assets. It’s closely linked to your brand – but it has broader implications in terms of your company’s place within the wider community. For example, do you support the local community? Do you offer financial or different kinds of support to local schools and charities? On a more practical level, do you pay your suppliers on time? Do you pay fair wages? Do you offer staff perks and bonuses? If you’re answering yes to these questions, then it’s likely potential buyers will be happy to pay more for your business.

In our modern economy, reputation may also be influenced by how much attention you pay to the environment. This is easier for some businesses to address than others. But regardless of which sector you work in, you could draw up a plan to make your business carbon neutral. You could also look at how rigorously you enforce recycling – either with the waste from product/service creation or in the office with using paper, cardboard and plastics in a sustainable way. Getting your environmental credentials in good order will increase the worth of your business for a significant amount of buyers. 

Bonus: 5 most significant factors that will bring your business value down

What will bring your business down

This would not be an ultimate list without mentioning the factors that could negatively impact your business value. Keep the list below on hand when reviewing your business strategy to ensure you don’t make any of these mistakes.

1. Over-reliance

Too much dependence on a single supplier, subcontractor, person (even the owner) or a  customer means that your business has few options in place if something goes wrong. Companies may also be over-reliant on a single region of the country or a specific target market. The risk of taking over firms like this will be much higher for a prospective buyer, so they will not want to pay top price.

2. Poor quality control

If you have a large number of returns on a manufactured product, it will affect profitability and customer satisfaction. This will have an impact on repeat orders and could mean you get negative comments on your social media channels. 

Poor quality control can also present itself in service industries. It can mean poor client communications in terms of quality of writing, or routinely slow responses to requests. Ultimately, all this may harm your brand and mean that your company is worth far less when you come to sell.  

3. Lack of innovation

Businesses that don’t update their product offerings run the risk of getting left behind by the competition. That means your business will not be worth as much when you come to sell.  Consumer behaviour changes subtly over time.

Still, there are defining moments when sudden shifts in consumer taste make a product or service redundant almost overnight. Think about Blockbuster Video vs Netflix, Waterstones vs Amazon or Vinyl vs CDs. Buyers will be looking for evidence of innovation, and the process and procedures in place to ensure the generation and development of new ideas. Don’t let your business value drop by lack of innovation.

4. Changes to legislation and shifts in the broader economy

Businesses may not reach their full market value if they are potentially at risk from changes to tax and employment legislation. Companies that rely heavily on zero-hours contracts may have to cut employee numbers or restructure operations if there are sudden increases in the minimum wage or benefits.

There’s not always a lot that owners can do about these external factors, but potential buyers may be more assured if you’ve written a risk assessment document that looks at how your business would adapt or deal with these kinds of issues. 

If at all possible, you should try not to sell your business during a recession. If you can wait out a dip in the global economy, then you should. 

5. Dated business premises (off and online)

If premises are poorly presented, badly maintained and not fit for the purpose, it will have a detrimental effect on value. This is true of shops on the high street, or businesses with any physical presence. Your staff should look smart and professional at all times. Similarly, poor website design can impact the value of your business too.

Failure to address these issues will put customers off. To potential buyers it may signal that you don’t care about your business enough and that other areas may be lacking attention. Both these concerns will drive down the value of your company.  

How to increase business value?

How to increase business value

It may seem challenging to take on the task of addressing all these factors in one go. But if you deal with a couple at a time, you’ll quickly start to see an increase in the value of your business. 

As a next step, why not consider talking with a business broker and get your business valued. If you’re just starting to address these factors, a business evaluation will provide a benchmark at the start of your journey.

If you’ve dealt with the issues, it’s an opportunity to see how far you’ve come and to decide if you’re ready to sell. 

Why not see if you’re eligible for a free valuation (three out of four businesses are)?