We often have discussions with business owners about the value of their business and what risk factors could be decreasing their value. It could be regarding strategic planning, preparing for a merger or acquisition, or succession planning for the owner’s eventual exit from the business.
While most people think the value of a company is based on earnings or sales, there are other factors that impact the value. These factors typically increase or decrease risk to the investor and can lead to lower values if a buyer demands a higher rate of return to account for the increased risk.
Five Risk Factors
Here are 5 factors that reduce risk to a buyer and lead to increased business value. You don’t have to be planning your exit to implement these strategies. Any business can work to reduce these risk factors and experience improved operations as well as increased profitability.
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Stable growth and earnings
A business with large fluctuations in revenue and profitability from year-to-year lacks stability. This could scare away potential buyers. Focus on building a steady rate of growth and stabilizing earnings over time.
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Diversity in customers and suppliers
High concentrations of revenue from a single customer or purchases from a single vendor represent a risk to your business. Increase business value by building your customer base to lessen the potential impact of a loss of a major customer. Consider finding alternative vendors for key materials and supplies.
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Documented policies and procedures
A potential buyer will pay more for a business that comes with directions on how the business runs. Documented policies and procedures keep employees on the same page, lead to increased efficiencies through orderly processes, and increase customer satisfaction by delivering a consistent product and service. Whether your exit plan includes selling to an outside party, or passing the business to family, documentation makes for a smoother transition.
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Develop key employees and focus on retention
A business that functions with little owner involvement is more valuable than one that requires ownership to make key decisions, or an owner that is the key salesperson or contact for major customers. Key employees retained through a business transition provide stability for the new ownership and, along with policies and procedures, help to create a turnkey organization. Retain key employees through the use of employment agreements, stock options, or other incentives that vest over time.
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Intellectual property
Patents, trademarks, and other proprietary information represent some of your strongest competitive advantages. The protection provided by these intellectual properties guards your business and ensures that competitors cannot easily replicate your product or service, reducing the risk of business lost to competitors.
How DHJJ Can Help
If you have concerns about risks affecting your business value or ways to increase the value of your business, please contact DHJJ’s Exit Planning Group at 630-420-1360.
