In my last post, I discussed the upcoming oversupply of companies for sale in the next 15 years, and why many of those company owners will be forced to resort to liquidation to recoup a fraction of their investment. I also suggested that if you don’t want to be one of the disappointed, it’s time to take a hard look at your company’s value right now to see what changes need to be made.
In this post, we’re going to look how to increase the value of your business. A quick caveat: This information applies even if you are not looking to exit your business in the next 10 years. Even those who intend to continue to play an active role in their business can benefit significantly by increasing that business’ value – and all of these strategies apply whether or not you intend to sell the business as part of your exit strategy.
Let’s start with some good news. Most private companies are capable of increasing the value of their business by 70-100% within 3 to 5 years. This means that even if your exit is right around the corner, you may still have time to increase your business value enough to fund your next ambition.
Most of the changes to your company won’t be drastic enough to alter your methods of doing business. The process of improvement is organic and highly dependent on your field, your employees, your business philosophy, and any number of other factors unique to you and the way you prefer to operate.
In short, none of these strategies require that you change your core motivations or philosophies.
They will, however, require that you look at your business differently and prioritize different goals. Where most company owners are focused on short-term goals, such as how to make your target sales for this quarter, I’m going to ask you to take a hard look at whether your business is also satisfying your long-term goals
What Can You Control?
There are only two categories of influence that impact what a buyer is willing to pay for your business: systematic risk and unsystematic risk.
- Systematic risk encompasses everything you can’t control: what the economy is doing, how the public markets are performing, and the individual needs of your buyer.
- Unsystematic risk includes everything within your control, including how well your business operates, whether it has the potential for growth, and how comprehensive its operations are to an outside observer.
Obviously, we’re not going to waste our time trying to manipulate the uncontrollable. We are, however, going to take a hard look at whether you’re currently paying sufficient attention to your unsystematic risks.
Unsystematic risks are, thankfully, quite predictable. Our method creates transparent links between each risk factor – such as inefficient processes – and initiatives that fix those risks, like an overhaul of your company’s processes for more efficient substitutes.
How Can You Start Changing Your Business’ Value?
You need to make a side-by-side comparison of all the risk factors endemic to your business. The laundry list of potential setbacks is fairly short, but neglecting to improve these risk factors will drop the value of your business like a stone when it comes to negotiating with potential buyers.
Potential buyers are only interested in businesses that are operating at the top of their game. They want businesses where it will be easy for them to step in, take over the reins, and continue to profit by using the same existing practices you’ve already set up.
If your practices are inefficient or draining profit, the value of your business goes down. If your business is operating at the top of its potential, the value goes up. It’s a simple equation.
The next step in this process – which we’ll cover in the final article in this series – is to link the value of your business now to its potential value, and create a roadmap that leads you from Point A to Point B. Once you make that roadmap, you start to view every aspect of your business as a potential place to improve its value – and its eventual sale price.
The result? The value of your business explodes. See you here next Monday when I share a roadmap for increasing the value of your business.