In our last post, we discussed key factors impacting business value. Read on for our take on how to increase business value.
Increasing Business Value
Though many analysts say we’re currently experiencing a sellers’ market, sellers still face intense pressure to enhance the value of their business on multiple fronts to appeal to skeptical buyers. Fortunately, there are numerous cost-effective ways businesses can increase value quickly.
Before undertaking any value-enhancement activity, sellers should develop a plan with specific goals in mind. To earn top dollar for their businesses, sellers must be able to clearly demonstrate how they have grown and how this will continue or accelerate. This analysis must be robust to pass the scrutiny of savvy buyers. If, for example, past growth has been primarily attributable to market growth—which is unlikely to continue—a buyer will not pay the lofty multiples a high-growth business can command.
If a goal of the plan is improving profitability, it’s also useful to understand margins and the profitability derived from each division, business unit, product and customer. Often, a financial statement simply shows the business is doing well without detailing which areas are thriving or underperforming. Consider investing in a more sophisticated reporting system that details all the aspects of a business’s performance.
Buyers love to find businesses that don’t understand their underperforming areas. This depresses the price and allows buyers to increase value significantly post-acquisition. But, sellers who do this well before the sale put the related value enhancement in their own pockets instead of ceding it to the buyer.
For sellers hoping to increase their business’s value through growth, critical first steps include gathering market research to assess trends, competitor intelligence and changes in tastes and demands.
Next, sellers can use this information to identify whether the market for their product or service is growing, and by how much. Clear market growth could be a strong basis for a strategic plan. Additionally, companies must identify and rank all other potential growth opportunities to determine their priorities. Companies that have low wallet shares with existing customers are usually appealing to buyers, as this indicates an opportunity to sell more to existing customers Also, prioritization is essential to any growth plan and can help a business more effectively allocate resources.
Once the growth plan is developed, it should be turned into a sales plan. To illustrate this point, consider a company that manufactured commercial surveillance products. The company was worth, at best, $3 to $4 million: earning $4 million annually in sales, losing $1 million, and unsuccessfully trying to grow. It had wallet share with many customers, but could not entice potential new customers away from the competition.
Once the Iraq War began, the company adapted its product to be sold to the military. Profit rose to more than $30 million, and the company was sold for more than $100 million. Though this case is extreme, it’s an excellent example of how a company can capitalize on market trends through a growth plan and dramatically enhance its value.
Another key consideration for businesses value enhancement is cost analysis. Many companies have costing systems that don’t accurately reflect the true cost of products. A more thorough understanding of product and customer profitability allows companies to target products and customers for margin improvement. While traditional cost accounting works well for GAAP financial statements, a more in-depth form of activity-based can optimize management and pricing decisions.
Stay tuned for our final installment of this series where we discuss risk management and setting your business apart.
Larry Goddard is a principal and practice leader in the management consulting practice at BDO USA, LLP. Larry has more than 30 years of management and advisory experience, helping hundreds of organizations throughout North America improve performance. He advises clients on strategic planning, operational and profitability improvement, turnarounds, bankruptcy, workouts, business restructuring and growth.
Larry Goddard, CTP
Management Consulting Principal, BDO USA, LLP
32125 Solon Road Cleveland, OH 44139
Dr. Tami Bolder is a Senior Manager in the Cleveland office of BDO Consulting and supports the Valuation and Business Analytics practice. She has over 12 years of experience performing business valuations for various purposes, including estate and income tax planning, litigation and marital dissolutions, as well as providing litigation services for multiple purposes such as wrongful death, fraud and breach-of-contract cases. Tami is currently focused on expanding BDO’s Healthcare Valuation practice, and she is one of 40 professionals nationwide who has successfully completed the American Society of Appraisers’ Multidisciplinary Advanced Education in Healthcare Valuation Program.
Tami Bolder, CPA, ABV, ASA, MBA, DBA
Consulting Senior Manager, BDO USA, LLP
BDO Cleveland - Solon Road Office