Building the Value of Your Business
Caught up in the day-to-day operations of your business, you may not be thinking about how much your company could be worth when the time comes for a transition. But the choices you make now, both large and small, can add to or detract from the future value of the company.
There are many ways for a company to grow, including entering new markets, developing new products, acquiring complementary businesses, hiring more employees, and increasing sales and marketing expenditures. You can grow the business rapidly by tapping into outside financing or more slowly by using the company’s own revenue. With so many strategies to consider, you may want to develop a long-term plan to guide the growth of your business.
Your decision regarding the ultimate disposition of the company may influence many aspects of your current business strategies, including your form of business ownership. You may want to consider a C corporation structure for a business that may go public or an S corporation structure if a private sale is planned. Be sure to consult with your tax and legal advisors about the implications of each form of business ownership.
To begin, work on building and maintaining your company’s transferable assets. These may include tangibles like property and equipment, as well as intangibles, including a customer base, brand recognition, and business processes. Depending on the type of business you operate, your intangible assets, such as copyrights or trademarks, proprietary lists of customers or prospects, and long-term contracts, may have substantial value at the time of transition. An attractive location can also add on value beyond an owner’s equity.
Companies also derive intangible benefits from a strong management team with the knowledge and connections required to maintain the business after the owner retires. In many cases, having a skilled and loyal workforce may also be considered a transferable asset in a sale.
When growing your business, strive to establish a self-sustaining enterprise with steady revenue growth. The financial performance of a company is often measured by its free cash flow, or the cash that it generates before interest, taxes, depreciation, and amortization, less capital expenditures. In assessing the value of the company, a buyer may, for example, project a company’s earnings over the next five years based on the current cash flow. This projection will take into account any outstanding debt, as well as whether revenue growth and margins demonstrate a history of consistent growth.
Businesses are often more efficient when they focus on their core competencies, rather than diversifying too broadly. So, if your company has product lines or offers services not closely aligned with the firm’s core business, consider whether these areas are profitable or represent a drag on the company’s resources. Selling off non-core assets may provide funds to help pay off debt.
You may also want to restructure agreements or contracts that may be objectionable to a potential buyer, such as a long-term lease, licensing contracts, employment contracts, and loan agreements. Long-term leases may be an asset provided the terms are favorable, the location is suitable, and the size is right.
If, however, the company is likely to outgrow its facilities before the lease is up, or if potential buyers want to move the firm’s operations, a short-term lease may be more appropriate. Or, you may seek to formalize certain verbal agreements to ensure the company’s relationships with key customers or suppliers continue after the transition.
For a detailed analysis of your company’s value, contact us at Fortress Business Advisory. Even if you have no immediate plans to leave the company, an estimate can help you identify ways to maximize the value of the business in preparation for a future exit strategy.
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