Many business owners only consider the value of their company when they begin planning their exit strategy, but by then it may be too late to significantly impact value in a positive way. There are also many circumstances that could require an owner to sell or transition the business sooner than expected. If you know the value of your business now, it will help you plan ahead and deal with surprises.
From purchasing equipment to hiring employees, every decision becomes an opportunity to improve the value of your business. Value is tied to a number of factors, both tangible and intangible, that impact the true value and perceived value in the eyes of a potential buyer.
One important planning opportunity is in the area of executive compensation. Business owners may want to incentivize one or more key employees with either ownership or non-ownership compensation plans. Since these plans are typically tied to company value, this can be a great opportunity to reward key employees and also can play a vital role in exit strategy and/or succession planning for current ownership.
Tangible Aspects of Business Value
Improving the value of the tangible aspects of your business can be done through strategic investments and by keeping a close eye on your financial statements. For example, identifying capital expenses such as new machinery or real property purchases can improve value.
Here are a few aspects of tangible assets that you want to consider for increasing business value:
- Owning vs. leasing physical assets: Physical assets include business furnishings, fixtures, equipment, leasehold improvements, inventory, real estate, automobiles and other physical items. Owning or leasing your building and equipment can have a significant impact on the deductions you are allowed to take; this choice can also affect your financial statements. To make the best decision for your company in these areas, consult with your tax advisor to determine which investments in physical assets and which terms or contracts are best for your business.
- Payroll costs: Payroll is one of the largest expenses in any business. If your payroll cost is too high, this impacts your margins and decreases the value of your company. To offset your payroll expenses, ensure that your employees are paid appropriately, and work to improve the services and goods you provide to your customers. By optimizing your operations and services, you can increase revenue to offset payroll costs.
- Fixed andcurrent assets (asset mix): Since physical, fixed assets are necessary to run the business, but may have a high cost of replacement, you want to balance your fixed assets with current assets. Current assets are fairly liquid while fixed assets fall into the Property, Plant, and Equipment (PP&E) category. PP&E assets can lose value over time, as they get closer to needing replacement, so owners need to manage the timing of fixed asset purchases as part of exit strategy planning.
Intangible Aspects of Value
Some intangible aspects can affect perception and drive the value of your business up or down, depending on the buyer’s perception of those areas. Whenever you can, keep records of valuable contributions to these intangibles. One example of this is to keep a log of employee training to show that there is continuous improvement and that you are invested in the success of your employees. Everyone wants a highly trained, efficient staff, but this can be hard to quantify and prove without a record of the training.
Other intangible aspects of value include:
- Personnel: Low turnover and high morale among employees are signs of a company’s operating efficiency and potential. A buyer will want key employees who want to remain with the company during a transition for continuity of service to clients and leadership consistency for employees. To retain these key individuals, review your executive compensation and how key leadership is incentivized to remain during sale or leadership transitions.
- Organizational structure: Roles of your employees should be evenly dispersed. You don’t want a business that is top heavy with executive level functions. Conversely, you don’t want to have too many employees in the trenches, as this could point to inefficiencies. Organizational restructuring can be a painful process, but may be required to maximize business value.
- Brand strength: How prospects, clients and employees perceive your brand is a potential indication of how your company will fare during a transition. A strong brand that can withstand leadership transitions provides a higher perceived value through employee retention and client loyalty.
- Business development pipeline: If you have a healthy pipeline of prospects at various stages of the lead generation process, you can show vitality and a bright future for your company. An active pipeline helps a potential buyer perceive additional value.
If you are unsure about the value of your business, a business valuation provides you with a road map to enhance the business’ worth. It’s a planning tool that can help define your strategy and provide peace of mind for your future.
When it comes to company valuation, it’s never too early to plan for high value and take steps to achieve it. Our Valuations group can provide a full valuation or a simpler calculation of value, based on your needs and goals. We help you understand what your valuation means and issues that improve and impact that value. Contact Ryan Campbell or Tracy Sams at 256-533-1040 for information or to schedule a time discuss your company valuation needs.