Everyone understands business value enhancement as a positive, but what does it really mean? Some obvious value enhancement tactics and techniques include improving a business’s balance of assets, sales, cash flows, and margins, although these can be tough to achieve. These value additions may be beyond the control of the business owners, depending on the sector and market. We’ll look at some few other elements that boost business value that are often easier to attain in this piece.
What qualifies as a business value enhancement?
In addition to the value enhancement tools and techniques previously mentioned, three additional business value enhancement strategies can significantly impact the value of a business to a potential buyer:
- Consistent operating procedures and systems: Consistency in operations is a competitive advantage that increases the value of a business for a potential buyer. Having a consistent operating strategy reduces the need to “put out fires” and generally increases the amount of energy that can be devoted to improving the business and its profitability. A proven operating strategy assures buyers that the business is positioned to increase in value.
- Limited reliance on a “key man” or another hard-to-replace asset: Businesses that are overly reliant on the founder/owner or on a key employee are less valuable to prospective buyers because it is unknown how the company will perform if those people no longer manage or work for the business. Wherever possible, the business should emphasize developing operating systems and procedures that do not rely on a key individual to keep it running smoothly. This strategy can also apply to over-reliance on a few key customers or suppliers.
- Formal agreements with key employees, customers, and suppliers: Contractual agreements with important suppliers protect the company on the supply end, while such agreements with employees and customers protect it on the operations and revenue fronts. Formalizing these relationships provides stability, which enhances value.
Other Factors Affecting Business Value Enhancement
Going concern value will always be greater than liquidation value since an intact, fully running corporation includes the worth of future revenues, as mentioned in a previous article.
Business value enhancement, aside from increased assets, revenues, and margins, boils down to the value of intangibles. Synergy may have a role in a merger or acquisition (M&A) transaction. The value of the business to the buyer will be increased if it will cover a gap or otherwise generate operating synergy for the acquiring company. The increasing value in these types of deals is investment value to the specific buyer, not market value. The tangible and intangible assets, as well as goodwill—which reflects the additional, synergistic value to the purchaser—will be used to determine the worth of the purchased business.
A number of intangible assets aren’t recorded in the financials and can’t be added to the balance sheet, especially in the case of a privately held corporation. Above and above the tangible book assets, the value of a well-established customer base, employees, and contractual agreements adds value. This value is not shown on the balance sheet and is only recorded when the company is sold in a merger or acquisition.
A company valuation, which includes cash flows, future output, the industry, and every other aspect that generates value, can be used to determine the enhanced value of a business in various types of transactions (or erodes it). The worth of both tangible and intangible assets, as well as future revenue potential from existing assets, will be captured in a thorough business assessment. The company can assess the worth of their company from the perspective of a neutral third party, or the value of the different assets of the business, depending on the reason for the valuation. While the fair market value business appraisal does not consider the company’s synergistic value, it can provide a wealth of information on how the market sees the value of the company.
Need help determining the value of your business—and how to enhance it?
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