Have you ever wondered, “What is my business worth?”
You’ve worked hard and are committed to the success of your business, but you might be considering retirement or pursuing a different career path. You may want to sell to an outsider or your children that are actively involved in the business. Regardless of the reason, focusing on increasing the value of your business will allow you to reap the rewards both now and down the road.
You first must consider what factors create value for a business. Put yourself in the shoes of a prospective investor or buyer. What would you want to know before determining an appropriate amount to invest?
Some key factors relating to business value are as follows:
- Financial Performance – strong profits, a track record of growth, cash generated and reserved
- Processes and Controls – well-documented processes, good controls, accurate financial records, CPA review or audit
- Scalability – revenues increase more than costs, possible franchise opportunities
- Dependency – employees, customers, vendors, business partners
- Management – strong team, clear roles, incentives to stay
- Customer Base – recurring vs. non-recurring, level of customer satisfaction and referrals
Now that you have identified what creates value, taking a good look at your own business to see how you measure up in these areas is the starting point. This will help you identify how you can start working on your business, rather than just working in the business.
Start by assessing the following four key areas of your business:
Review each area closely and gather input from your employees when appropriate. Most likely, you will identify areas for improvement. The next step is to prioritize the issues you’ve identified and develop a plan to start solving them.
Specifically, in the area of finance, it is critical to have accurate financial records. This will provide the basis not only for reviewing profitability but also for calculating key performance indicators (KPIs) that can help monitor key business activities and drive profits. Some examples of Financial KPIs are revenue growth, gross profit margin, inventory turnover, operating expense ratio, and cash flow forecast. You need to determine which KPIs are most relevant to your business and industry to ensure that you are monitoring the right things. Once you have identified the KPIs to track and have accurate financial information available to calculate them on a regular basis, you can use the results to help focus your attention on what matters most. KPIs also provide a good, analytical basis for decision making as you strive to improve in the areas you identified earlier that need improvement.
Whether you want to increase the value of your business to provide more income now, sustain a viable company to sell for retirement, or reduce the worry of meeting financial obligations, don’t delay in taking time to work on your business to make it better. Identifying and improving just a few things can make a big difference. If you need help getting started with this process, contact your TDT professional today.
Jodi Kerr, CPA, is a tax partner with over 30 years of experience providing tax and consulting services to business owners and individuals.