6 Drivers of Business Value

What's the first question to ask before deciding to sell your business? For many, it's "what is my business worth?" In fact, a proper valuation is one of the most important steps to take before putting a business on the market. However, you shouldn't wait for selling time before asking yourself this question. To make your business worthwhile to a buyer, you should be taking steps to boost your business's value long before you decide to step away. Not sure where to start? You're in luck. Follow along to learn what factors drive the most successful businesses.

What is an "A" Company

An "A" company is one that is most valuable to a buyer. It stands out among the rest of the companies in its niche by strategically tailoring its business strategies to produce maximum profitability, longevity, and potential for growth. An "A" company also has minimal risks for a potential buyer to contend with. Simply put, these businesses minimize risk and maximize reward. What's the secret formula? The six factors below combine to form the recipe for an A-list business model.  

1. A Forward-Thinking Business Model 

How far does your vision extend? A successful business is always looking to the future and is proactive in anticipating the needs of customers. If you're only looking at what's right in front of you, your business won't grow far beyond your line of sight. By keeping your eye on advances in technology, being proactive in your marketing strategies, strategically maintaining barriers to entry and constantly assessing your growth potential, you'll be able to look ahead to a bright future for your business.

Technology

Companies should always be investing in research to develop products that can meet the demands of future consumers. Technology is always advancing, and if you can't keep up with modernization, you'll be left in the dust and your company's value will suffer as a result. Successful companies are investing in the development of modern, high-performance products that exceed customers' expectations. Don't just keep pace with other businesses; invest in development so that you can stay one step ahead.

Branding and Marketing

In the digital age, in which trends fizzle out as soon as they begin and the line between relevance and obsolescence is getting thinner, appealing to your customers through smart marketing strategies is very important. "A" companies have a strong, recognizable brand identity that their consumers trust. Now is the time to be honest about your sales and marketing shortcomings and to address them by tapping into your strengths. Through consistency and attention to the ever-changing digital sphere, you can maintain a brand that inspires consumer trust and allegiance.

Barriers to Entry

Sometimes, in developing a forward-focused vision, you need to peek into your periphery. Being attentive to your competitors is another way to stay ahead of the game. In particular, it's important to position your business in a way that blocks competitors from your sphere. You can do this by differentiating yourself from others in your niche and protecting these distinctions by securing patents, copyrights, and hard-to-get licenses.

Growth Potential

All of these strategies serve the goal of boosting growth potential. When somebody buys your business, they're investing in its future. You should always be investing in products that produce high profit margins and working to expand them. Once you decide to sell, provide potential buyers with evidence of your business's growth potential via a realistic growth plan. 

2. Multiple Sources: Customers, Suppliers and Products

You've heard the old saying: don't put all your eggs in one basket. In a business, this holds true. Diversification is essential in reducing risk, which – as we said above – is a big part of what makes an "A" Company.

Customers

As a rule of thumb, no one client should be contributing more than 10% of your total sales. When you rely too heavily on one customer, you essentially give them a monopoly over the success of your business; if they decide to take their business elsewhere, you're in deep trouble. By appealing to a diverse array of customers, you can prove to a potential buyer that your business has reliable, sustainable sources of income for the future.

Suppliers

As with customers, you don't want to give one supplier the monopoly over your business. It's best to source your materials from multiple places to prevent an overreliance on one supplier. After all, what happens if your irreplaceable supplier needs to be replaced? Save yourself and your future buyer that stress by cultivating a diverse array of suppliers.

Products

Likewise, you'll want to avoid basing your revenue on just one product or service. "A" companies have their toes dipped in a variety of industries, in case there is an industry downturn. If you're able, diversify your services so that you have a safety net should things take a turn for the worst. 

3. Upward-Trending Revenue

Some say that not all progress is linear, but in this case, it needs to be. All valuable companies have this one essential in common: they bring in steady, consistent and growing revenue. To prove to a buyer that your business is worth top dollar, it needs to be worth the investment. An upward-trending cash flow is a great way to back up a business's up-front cost. If your business has a recent history of downward turns or plateaus, it will likely decrease a buyer's trust, thereby minimizing the price they're willing to pay.  

4. Excellent Documentation

How do you prove that your business is successful if you have no record of it? Not only do good record-keeping practices help to back up your business's success to a potential buyer; they also provide peace of mind that you're running a clean business. Your record keeping should include financial statements, income statements, tax filings, asset records and personnel records, to name a few. Lack of, or disorganized, record keeping could indicate to a buyer that things aren't as they seem. Give your buyer – and yourself – some peace of mind by developing an organized, efficient system to track your progress.  

5. High-Quality Equipment and Facilities

The quality of a business's equipment and facilities is a good indicator of its overall quality. For a potential buyer, a dingy and ill-maintained facility could be an indication of other underlying problems; if a business owner can't keep their facilities in order, what else might be out of control? Beyond aesthetics, high-quality, up-to-date equipment ensures that you are producing quality products, which is essential to maintaining customer satisfaction and ensuring continued cash flow.

Additionally, you should be attentive to your choices when leasing space. If you have an unfavorable rate or your lease is set to expire soon, it could cause potential buyers to incur additional cost. To prevent deterring potential buyers with leasing burdens, be sure to fetch a competitive– and long-lasting lease rate for your business facilities. All of this will help to prove that your business is worthwhile to a potential buyer. 

6. Invest in Relationships

At the end of the day, your business can't run without one essential factor: people. You need other people to buy your products and to work alongside you. Therefore, one of the most important investments you can make to grow your business value is in the people who work for you and who buy your products.

Customers and Others in the Industry

Don't cut corners when it comes to connecting with customers and other industry professionals. The depth and breadth of your relationships in your niche go a long way toward minimizing potential risks and increasing rewards. These relationships can provide a safety net that a potential buyer can rely on, ensuring longevity of profits to offset their initial investment in your business.

Employees and Management

Strong management and employees are the backbone of any successful business. These are the people that a potential buyer will be relying on to help maintain the business as it switches to their hands, so it is important to hire, train and retain people who have an intimate knowledge of your company's inner-workings. In order to maintain an excellent and reliable workforce, long-term incentives and similar systems should be in place long before you decide to sell. Though investments in hiring, trainings, and incentives may seem like a lot up-front, they'll pay off in the long run. 

We hope that this information serves you well in your endeavors toward an ever-growing business. We want our clients – sellers and buyers alike – to get the best possible deal when navigating and negotiating the sale of a business. If you are considering buying or selling a business, it is not a decision to take lightly. For the seller, it could mean parting with your life's work. For the buyer, though buying an already established business is less risky than creating your own from scratch, you'll have to invest quite a bit up front. Whether you've already made up your mind or you still need to think on it, visit the Business Brokers of Texas website to look over our services or call 210.697.8760 to set up a free 30-minute consultation. Our dedicated team, made up of business professionals with over 40 years of experience, is anxious to work alongside you as you navigate this next big step.