As a business owner, you’re constantly strategizing to boost your profitability. Whether improving your products, boosting your marketing, or lowering your overhead costs, much of your mental energy goes towards increasing the return on your investment.
In a recent conversation with Brandon Bauer of Voisard Asset Management Group, Max Friar, Managing Partner at Calder Capital, shared actionable tips to help business owners increase their company’s value. Calder has completed nearly 300 lower middle market transactions since 2013, and Voisard asked Max to discuss the most impactful area to improve valuation. By focusing on five key areas—customer diversity, recurring revenue, strong teams, accurate recordkeeping, and profitability—owners can reduce risks for buyers and build trust, ultimately leading to a higher valuation. Here, we explore these strategies in detail with practical examples.
Not Selling? No Problem! Fortunately, for the business owner who isn’t ready to sell, many strategies for building valuation can also boost your company’s profitability. So, while you may be adding just a bit more to your plate by thinking about these strategies now, it will only compound your return on investment in the short and long term.
5 Strategies for Building Business Valuation
1. Customer Diversity: Spreading the Risk
Relying too heavily on a few customers is a significant risk for buyers. If those customers are lost, the business could face serious challenges. Buyers often respond to this risk by offering less money or requiring seller financing to safeguard their investment.
**Example:** Imagine a manufacturer that generates 80% of its revenue from a single automotive client. By expanding into industries like aerospace or consumer goods, the company could reduce reliance on one customer and make its revenue stream more secure. Even if your business has high customer concentration, it’s not unsaleable. Buyers may adjust the deal’s price or structure to compensate for the added risk.
2. Recurring Revenue: Building Predictability
Businesses with recurring revenue are highly attractive to buyers because they offer stable and predictable income. Whether through subscriptions, service agreements, or long-term contracts, recurring revenue models reduce financial uncertainty.
**Example:** Software companies thrive with subscription-based models, making them favorites in the market. In contrast, a construction business dependent on one-time projects could improve its valuation by offering ongoing maintenance contracts or consulting retainers. These changes provide consistent revenue streams and lower perceived risks.
3. Building a Strong Team: Replacing Yourself
A business that relies too heavily on its owner can be a red flag for buyers. A well-structured management team signals that the business can operate independently and continue thriving after the owner steps away.
**Example:** A distribution company owner might hire a general manager to oversee daily operations and implement cross-training for key roles. By stepping back from hands-on management, the owner demonstrates scalability and instills confidence in prospective buyers.
4. Good Recordkeeping: Creating Transparency
Disorganized or incomplete financial records can turn away potential buyers. Accurate, detailed, and professionally reviewed financial statements not only build trust but also simplify the due diligence process.
**Example:** An e-commerce company that uses advanced accounting software and hires a CPA to audit its financials presents itself as reliable and transparent. Buyers appreciate clear records, which reduce transaction friction and foster trust.
5. Profitability: The Core of Valuation
At the heart of any valuation is profitability. Buyers are purchasing a future stream of earnings, so it’s critical to demonstrate consistent profitability. Strong cost control and margin improvements are essential for boosting valuation.
**Example:** A restaurant chain might increase its profitability by renegotiating supplier contracts or introducing higher-margin menu items. Implementing these changes 2-3 years before selling can significantly improve valuation metrics and buyer interest.
Planning Ahead: A Roadmap to Success
Meaningful changes take time. Business owners should start preparing at least 2-3 years before they plan to sell. By addressing customer concentration, building recurring revenue, strengthening their team, maintaining meticulous records, and improving profitability, they can create a more attractive business for buyers. If you need assistance, it is recommended to work with a Certified Exit Planning Advisor (CEPA).
Whether you’re considering an exit in the near future or simply want to enhance your business’s value, these strategies are smart investments in your company’s success.
