Based on the positive response from the previous blog on tips to increase the value of your business, we compiled ideas for a follow up article. The original blog focused on tips that directly impacted the earnings and cash flow generated by a company. The tips in this iteration focus on non-financial improvements that can be implemented to increase company value.
Minimize Reliance on Key Employees – While it can offer great job security for the employees, relying on a small handful of key employees to run a business increases the risk associated with an investment in the company (which reduces its value). Additional risk is present because the loss of any of the key employees could have a material negative impact on the company’s ability to operate at its historical levels. Therefore, the deeper a company’s bench strength, the better equipped it is to handle the potential departure of current key employees, which reduces investment risk and has a positive impact on value. The moral of the story – begin developing successors to key positions now so that they are able to step in should a key employee depart.
Diversify the Customer Base – Another factor that leads to increased investment risk and, consequently, lower company value, is a highly-concentrated customer base. When a company places significant reliance on a small number of customers, the loss of even one of those customers could severely impair the company, both operationally and from a value perspective. Therefore, by working to expand a company’s customer base and reducing reliance on its largest customers, the risk associated with an investment in the business decreases, which in turn increases its value.
Make Your Working Capital Work For You – In some industries, it is inevitable that significant investments in accounts receivable and inventory will need to be made. In other industries, companies may not be able to build an accounts payable balance and stretch out vendor payments due to the leverage that those vendors have. To the extent that a company is able to reduce the amount of working capital that it needs to operate effectively (by speeding up collections, reducing inventory investment, or stretching out vendor payments), it can increase the value of the company by freeing up more cash flow that can be distributed to the owners or reinvested in the long-term growth of the business.
As discussed before, a valuation expert can help you quantify the impact of value improvement strategies and assist in determining whether you are receiving an appropriate return on the changes that you plan to implement.
For more information on how to increase the value of your business, contact Sean Saari in our Cleveland Business Valuation Services group by leaving a message below, or by calling 440-449-6800.