“What’s my business worth?” This is one of the most common questions we hear from owners, yet one of the most difficult to answer because value is not the result of a simple quantitative exercise. The reality is that the math is driven, to a large extent, by a buyer’s qualitative assessment of the risk associated with the cash flows of your business. As a result, if you want to increase the value of your business, you should focus on decreasing that risk. Following are three tips that can help decrease the risk profile of your business.
1.Focus on developing recurring streams of revenue.
I once worked in a business that benefited from large, up-front sales to customers, with low levels of ongoing revenue. As we saturated the market, it became harder and harder to generate similar levels of ongoing sales, despite the fact that we dramatically increased our investments in sales and marketing. However, over time that industry moved to a subscription revenue model, which dramatically reduced the unpredictability of the revenue stream, and also led to a significant increase in business multiples. If you sell products and find that your sales are lumpy, look at your offerings and ask yourself whether you could move to a leasing model. If you are in a service business, consider whether your customers would pay a subscription fee to have access to your services rather than charging them for each individual project.
2.Develop a diversified customer base.
Your risk profile is much higher if a large portion of your revenues are generated from a small number of customers. This is a common problem in early stage businesses, but one that must be overcome in order to lower your risk profile—even if you have no intention of selling your business. The challenge is that it can be difficult to justify reducing resources that are committed to large customers in order to channel those resources to smaller opportunities. If you can’t channel existing resources, then it may be necessary to generate additional funds by reducing distributions or raising capital, and then using those resources to fund sales and marketing activities.
3.Diversify your talent pool.
Walk around your office or plant and ask what would happen if any one person was hit by a bus, and don’t forget to look in the mirror and ask the same question about yourself. Acquirers don’t like businesses whose success is heavily dependent upon the continuing involvement of one, or a small number of employees. As a result, if you want to increase long-term value, you may need to sacrifice short term cash flows by investing in your leadership team.
Taking these steps will not only increase value, but will also lower your stress level, because you’ll benefit from a more stable business that is not solely dependent upon your efforts.
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