Privately-held companies are often valued based on the cash flow expected to be generated by the business. All else being equal, greater cash flow will drive a higher value of your company.
In Part 1 of the 3 Strategies to Maximize the Value of Your Privately-Held Company, we noted that business owners often struggle to find time to focus on big-picture issues that have an impact on their company’s value. These factors can be financial (e.g., product expansion to increase revenue, cost cutting strategies, etc.) or non-financial (e.g., customer satisfaction, management depth, etc.). Part 1 included a few financial factors that have an impact on a company’s value. In Part 2, we will focus on non-financial factors that business owners can address to enhance the value of their company. Although a business owner may not see a direct impact on cash flow (in comparison to revenue growth or a cost-cutting strategy), these non-financial items could impact the risk to the company’s cash flow, which in turn impacts its value. In simple terms, the lower the risk associated with an investment in a company, the higher the value (and vice versa).
- Provide Best-In-Class Customer Service – Securing a new customer may be exciting on day one, but the work doesn’t end there. There is constant pressure to keep customers happy. Therefore, every company in every industry, big or small, must put superior customer service at the top of its list if it wants to create sticky, long-term customer relationships. Stickier customer relationships create value by generating consistent, reliable revenue streams.
Without customers, businesses can’t survive. As a business owner, ask yourself the following questions to better understand your customers and the risk of losing them:
- Can your customers easily transition their business to a competitor?
- What is your customer attrition rate (i.e., how often do your customers leave and go elsewhere)?
- On average, how long have your customers bought your product/service?
- Has your customer list been growing?
- Do you have any significant customer concentration?
- Is feedback available from your customers to assess their perception of your company?
- Why do your customers choose to do business with you?
These questions may seem simple, but they can have a significant impact on the risk of a business. Therefore, if you can carve out time to regularly evaluate the reasons why customers choose your company, and work to emphasize these factors in your business model, you can reduce the risk of an investment in your business, which will increase its value. Furthermore, you may learn about what drives your customers’ behavior, offering valuable insight into your sales process.
- Document Processes and Controls – How well do you think you know the “ins” and “outs” of your business? What would happen if your CFO unexpectedly quit one day? Do you understand and have you documented your business’ key processes and controls? Documenting your critical business processes can make you more efficient in onboarding new employees and position the company to absorb the negative effects of an unexpected departure of a key employee.
Documenting processes and controls is a time-intensive (and often tedious) process. It can also be difficult to find time for employees to fit this work into their already busy schedules. If this investment of time is made, however, it can create efficiencies in the long-run and protect the company against unexpected employee departures. It also reduces the risk associated with an investment in the company, thereby increasing its value. Accounting firms (such as Skoda Minotti) are also able to assist with documenting processes and controls, which can reduce the related time burden for the company’s employees.
- Employee Retention – It is hard to find and keep talented employees. I was recently at a conference where the speaker mentioned that the average employee spends only four years with a company before leaving for a new job. A simple suggestion for an owner is to review market data on compensation and benefits offered for similar jobs in the industry. If your compensation and benefits are not up to par with the industry norm, your employees may be inclined to look elsewhere for employment. In addition, an owner should also give thought as to whether the company’s culture and non-cash benefits help attract and retain employees. Examples of these items include flexible work schedules, a welcoming work environment, opportunities for advancement, challenging work, and company events (golf outings, holiday parties, family outings, etc.).
Employee retention is crucial to efficient business operations. If your employees stay with your company, it can reduce costs associated with having to continuously retrain your workforce. The time, money and energy saved in avoiding these recruiting and training costs will increase cash flow and the value of your company. Strong employee retention reduces the risk of an investment in the company, which increases its value.
Wrapping It Up
There are many non-financial decisions that owners make every day which have a real impact on the value of their businesses. The non-financial considerations outlined above can have a real impact on increasing the value of a business without needing to increase revenue or cut costs. Watch for additional recommendations for maximizing the value of your privately held companies in the conclusion of our three-part series.