What Makes a Business Valuable


Learn how business owners, managers, and other stakeholders can do to increase the value of a business over time.

 

As a business valuation firm, we are frequently asked, “How can I increase the value of my business?” This is an excellent question, and savvy business owners should be considering the value of their company even if they do not intend to sell. Business value impacts access to capital, taxes, estate planning, and more.


In this post, we’ll look at the fundamental aspects of business value. We’ll also explain what business owners, managers, and other stakeholders can do to increase the value of a business over time.


Increase Business Value with Strong Fundamentals

When considering business value, it is useful to consider what a buyer on an open market would look for when purchasing a company. Even if a business has no intention to sell, this perspective can help owners determine what metrics they should focus on and what actions they should take to increase value.


Increased Earnings and Profits

One of the most straightforward ways to increase business value is to increase overall earnings and profits. The vast majority of the time, a business that makes $200 million a year will be worth significantly more than a business that makes $20 million a year.


The same holds true for profits. The more profitable a business, the more appealing it will be for investors. Earnings and profits show potential buyers that a business will be worth their investment, and that they can make a good return.


There are exceptions to this trend, especially for companies that are particularly innovative or disruptive to existing markets. These businesses are often given a grace period by investors where they are not expected to be profitable because they are investing resources in growth or innovation.


De-Risk

Investors dislike risk, so companies that have fewer risks will be considered a better investment, and thus have a higher value. There are many different types of risks that business valuation experts look for, and each company will be different.


For example, it is common for businesses, especially family-owned businesses, to experience key-person risk. This happens when someone is vital to success and is difficult to replace. If this person is unable to work, the company can suffer. If this person competes, the company will suffer more. Other common risks include dependence on a single supplier or customer, significant debt that a company might not be able to repay or refinance under similar terms.


Companies can increase value by working to mitigate risks that have been identified internally or through the business valuation process. For example, companies that are dependent on a single supplier can expand their network, and businesses facing key-person risk can increase the size of the management team.


Regular Distributions

Investors are often looking to recoup the cost of their investment, and one way to achieve this is through distributions. Companies that have a strong track record of regular distributions will be more appealing to investors, which in turn increases the value of the business.


Consistency in distributions is a primary driver of business value. If a business is distributing profit year after year, value increases. Inconsistent distributions are still better than no distributions, but consistency indicates business health, thus increasing business value.


Consistent Growth

Companies should aim for consistent growth to increase business value. As a baseline, businesses should target growth that is at least as fast as the economy, currently 1% to 2%. Additionally, companies should be growing at least as fast as their industry. If an industry is growing at 10% but an individual business is growing at 8%, that will decrease value.


Companies that are unable to meet these economic and industry growth metrics are shrinking. Shrinking businesses are obviously not as desirable. Sometimes shrinking businesses have no market and no value.


Other Ways Businesses Can Increase Value

In addition to improving the fundamentals, businesses can increase value through innovation and quick responses to market or industry disruptions.


Respond Quickly to Disruptions

Most business owners know what it is like to innovate and move quickly to establish a position in the market. Successful owners and managers go all out in the beginning. Eventually many reach a point where the business is doing well and they slow down. Slowing down allows others to enter the market and the slide down begins.


One example of this is the taxi industry. A few decades ago, the taxi industry did not have a reputation for customer service. Transactions were typically limited to cash, and the taxis themselves often weren’t maintained well. When rideshare services disrupted the market, the taxi industry was slow to respond. Uber and Lyft provided a much easier experience for customers to get a ride and pay. Because drivers were using their own cars, the vehicles were often nicer. It took a long time for taxi companies to match the ease and convenience of rideshare services, resulting in a decrease in the value of taxi companies as Lyft and Uber gained market share and popularity.


Innovation

Companies that continue to innovate can benefit from market disruptions and increase business value. When Amazon started to become popular, retailers like Walmart and Target had to improve their online shopping experiences or risk being left behind.


Smaller businesses can follow the pattern and learn from competitors. The Mom and Pop coffee shop can pull from the variety that Starbucks offers. A hardware store can offer high-end fixtures that customers can’t find at big-box retailers like Home Depot. A track record of innovation and responding effectively to market disruptions can increase the value of a business in addition to the fundamentals such as growth and revenue.


Valuation Firms Can Help Increase Business Value

There are many actions business owners, managers, and other stakeholders can take to increase the value of their business over time. Consider utilizing an outside expert like Adams Capital to assist in identifying and measuring value driving metrics.

Adams Capital has experience in helping privately held businesses increase value using smart, forward-thinking strategies. We offer a no-cost initial telephone consultation to business owners considering questions of business value.


Please email us at tara@adamscapital.com or call us directly at 770-432-0308​ to schedule a consultation or to learn more.

 

Author

David Adams is the President of Adams Capital, LLC. He is an expert in the valuation of businesses, business interests, and tangible and intangible property for mergers and acquisitions, corporate recapitalization, privatization, gift and estate tax planning, bankruptcy proceedings, dissenting shareholders, Employee Stock Ownership Plans, and financial and tax reporting. Frequently counseling business owners and families on methodologies to enhance shareholder value.

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