Quality companies. The more time, effort and energy you spend in developing, growing and expanding your company, the more buyers it will attract.
Business owners tend to focus on the top line. Though it is the most obvious critical area, there are in fact other areas as important and cannot be ignored. These are listed as follows:
- Solid Management Team
- Quality Products and Services
- Systems and Processes
- Strong Sales and Marketing
- Low Risk
- Increasing Revenue and Profits
- Growth Potential
- Clean Financials
These are also the factors that will grab buyers’ attention and interest, and increase the business value to drive the best possible price.
3 Common Mistakes To Avoid For The Best Business Value Are Discussed Below:
1. Driving revenue instead of the margin
Increasing revenue is important. Unfortunately, in the process of driving revenue, one can easily ignore the profit margin, which can then decrease the business value. This is because the gross profit margin is actually the percentage of revenue left after accounting for the ‘cost of goods sold’.
Hence, when a business ignores its profit margins to increase its gross revenues, its overall profitability and business value decreases, which then weaken their market attraction.
A key strategy to increase the margin is to include recurring revenue, which is guaranteed revenue over a certain period of time that does not need the same amount of time, energy and effort as the one-time revenues. Such revenues usually have a much higher margin and are likely coveted by buyers.
Studies have also shown that companies with recurring revenue are sold at multiples much higher than those who do not have.
Hence some forms of recurring revenue are as follows:
- Subscriptions for information, products or services
- Contracts for consumable products or replacement parts
- Agreements for service or maintenance
2. Sustaining dependence on the business owner
An attractive business is usually run by a highly capable owner who knows everything about the business and its operation, and controls it all at the fingertips – the processes, procedures and technicalities. Sometimes even to a point when the business is the owner.
But at this point, no matter how successful and lucrative the business is and will be, it is less attractive to the buyer and loses its appeal and value – how will the business operations continue without the owner?
This then creates a huge risk for the existing owner.
Hence, besides the revenue, the business’s dependency on its owner is also another driving force of the business value – and surprisingly, it is one of the biggest concerns among buyers.
3. Focusing on tax minimization
To preserve the true profitability of a business, it is in the good business sense for business owners to drive the operations in a way that minimises income taxes – but this is not the best practice for achieving a maximum business value.
One way of minimising income taxes is to hold ‘lifestyle businesses’ – this involves using money generated from the business to fund the lifestyle of the business owner’s family, as much as possible; the tax burden will then be kept as low as possible. Unfortunately, such lifestyles tend to become increasingly expensive and the money earned from the business will be increasingly spent rather than saved.
Also, though it is called ‘a business’, ‘lifestyle business’ is by nature a form of consumption; not an investment that actually creates wealth. So while the owner appears to have ‘lower profits’ on paper, he/she is actually losing a staggering amount of sales in the process.
The Value Of A Business Can Improve With A Viable Contingency Planning:
Businesses with sustainable profits and are transferable attract more interest and buyers. These businesses would have a steady solid successor and management team.
Hence it is critical to develop a contingency plan that involves a succession plan and a strong management team to ensure business operations in whatever circumstances – such as a change in ownership or leadership, or an unforeseen external event. With a more viable contingency plan in place, the business is sure to have a high value and fetch the best price.
Speak with an experienced valuation specialist in Singapore today.