Having been involved with hundreds of valuation engagements, we have seen the good, the bad and the ugly of company values. What we have found is that the companies with the highest values tend to have a few operational characteristics in common. With that in mind, we would like to share a handful of tips based on what we have seen in place at high-value companies that you can consider when working to increase the value of your business.
Earnings / Cash Flow Volume – The amount of earnings and cash flow that a company generates is often the primary driver of its value. The greater the earnings and cash flow, the higher the value. Conversely, if a company has a significant amount of revenue but generates losses and negative cash flows, it is likely that it does not have significant value because there is little to no profit accruing to the owners. Therefore, the most broad-based improvement focus that can significantly increase the value of a company is improving its earnings and cash flow levels.
Keep an Eye on Margins – As discussed above, improving earnings and cash flow is the surest way to increase a company’s value. This can be accomplished in one of two ways: 1) increasing revenues or 2) reducing expenses. Considering the current economic climate, revenue growth has been hard to come by for many companies in recent years. When revenues are stagnant, it becomes even more important to focus on maintaining or reducing costs in order to increase earnings/cash flows. Therefore, by keeping a steady eye on a company’s margins, following up on variances and proactively addressing changes in cost structure, it can be possible to increase a company’s margins (and its value) without revenue growth.
Shift Gears – For manufacturers, distributors and other non-service-based businesses, there may a standard 8:00 – 5:00 schedule in place for general labor employees. As customer orders ramp up, the first thought may be to add additional equipment and employees to handle the workload during the 8:00 – 5:00 timeframe. Rather than purchasing additional equipment to satisfy increases in demand, consider additional work shifts – this allows the company to reap the rewards of additional production without needing to invest in new equipment to meet demand. This saves the cash that would have been invested in new equipment and allows for more efficient use of the Company’s fixed assets, resulting in the cost of the equipment in use being spread over a larger production base and reducing the cost per unit.
There are many ways for a company to increase its value – the ideas above only begin to scratch the surface. A valuation expert can help you quantify the impact of value improvement strategies and assist in determining whether you are getting enough bang for your buck when implementing such changes.
Have questions about increasing the value of your business? Post a comment below or contact our Certified Valuation Analysts at 440-449-6800.