Any entrepreneurially minded business owner knows that increasing the valuation of a company can yield a lucrative path to wealth creation in the future. In fact, the pay-off can be big. According to Forbes, 4 out of 5 people with a net worth of $5 million or more are entrepreneurs who grew and eventually sold their own businesses. Even if you aren’t planning to sell your business anytime soon, chances are that you are constantly looking for ways to grow and establish your company. We’ve gathered our top tips for increasing business valuation so that one day, a would-be buyer could be more confident in making you an attractive cash offer.
1. Develop Recurring Revenue
A recurring revenue stream may not be possible for every business model, but it can be a powerful tool in the arsenal of an owner looking to sell. Purchase renewals help guarantee that a business will continue to generate revenue long after an acquisition or merger is complete. Returning customers create a strong foundation on which a new owner can continue to build a business. There are several ways of creating recurring revenue streams, with some more profitable than others. Whether you sell a consumable product, encourage automatic renewals and monthly billing, or have your customers locked into long-term contracts, recurring revenue can significantly boost business valuation in the eyes of a potential buyer.
2. Embrace Change and Diversity
Diversification is an important strategy for wealth-building, and that strategy applies to business growth too. Your client base should always be growing — not shrinking. If your targeted demographic is aging and you aren’t attracting new customers, your valuation could suffer. Look for ways to broaden your marketing efforts to reach new clients and offer diverse products or solutions that appeal to a wider market.
3. Get Your Affairs in Order
Paperwork is a headache for any business owner, but disorganized or incomplete paperwork can be a nightmare. Buyers will put greater value on a business that has its affairs in order, files updated, and records organized. Start by moving from paper filing to a digitally based system for easy reference. Make sure any debts and financial obligations are under clear terms with fixed arrangements. Consider long-term expansion needs when signing new leases, and document all of your business’s finances in detail to show a potential buyer evidence of profit and growth over time.
4. Protect Business Relationships
Every successful business is built on relationships. It is impossible to start up and operate a business without customers, not to mention valuable professional connections. Learn to nurture all of your business relationships — not just the ones that seem to have the most value at the time. Maintain contact, send out birthday and thank you cards, and become active in your local community. Most importantly, ensure that these business relationships run deep into your company’s infrastructure and do not begin and end with you.
5. Create Internal Successors
One of the most difficult challenges that a business owner will face is creating a solid internal structure that will maintain the company’s viability in the owner’s absence. Potential buyers need to know that business will continue as usual despite a previous owner’s departure. Depending on the size and type of business you own, it can take many years to find and train managers and employees who are capable of operating your business without you. Adopt a policy of internal promotion where possible to raise your employee retention rate and avoid having to train top-level employees in your company’s vision and culture. Learn to delegate; and make a goal of being as hands-off as possible by the time you are ready to sell.