Boosting your business value in a tough climate

Although it may well be something as mundane as the availability of adequate car parking that determines whether potential clients frequent a business or not, there are steps that can be taken by the owner to increase the potential value of any business during prolonged economic uncertainty.

Exit Strategy (emotive words!)

All business owners should have in mind an exit strategy. This may simply be a 'wish list' reflecting the owner’s desires. Or it could comprise part of a detailed formal business plan.

Either way, an exit strategy should, ideally, be planned at least three years ahead if a satisfactory valuation and successful sale or transfer are to be achieved. If an owner feels they haven't got the experience or the time to develop a plan, a consultant or someone who can help should be hired - it will almost certainly be a sound investment.

Preparing a business for sale

There are many things to do, most of them simple, if the business is to be put on the open market. For example, if the business has premises, the physical appearance should be up to scratch.

As with selling a house, so called “kerb appeal” is vitally important when selling a business. When a homeowner wants to sell their house, they may paint it, fix up a couple of things that needed to have been done during the last few years, and polish the taps.

Simple, and obvious, but unarguably effective. So to with business owner, they can improve the value of their business by making a few changes. First impressions count and can be the difference between a successful sale and lost opportunity.

Clearly, financial performance - and growing trading profit in particular - must validate that the business is performing well

Profits - and profit growth - are the most important

Clearly, financial performance - and growing trading profit in particular - must validate that the business is performing well.

As an example of the dramatic effect of profit growth on business value, in a recent one-year update valuation of a healthcare business undertaken by RA, sales had increased over the last year by an insignificant 5% but purchases were maintained at the same level and overheads cut by 5%. The resultant goodwill was valued at over 40% higher (than the previous year) solely as a result of these changes.

To illustrate this condition, a hypothetical example shows how three relatively simple improvements can show an inspired upward trend. Trading profit can be doubled in three years by improvements of 7% in three other areas, all under the owner’s control - namely sales, gross profit margin and reduction in cost ratio (overhead costs as a percentage of sales).

In the day-to-day running of a typical business, this equates in simple terms to a combination of:

• Increasing sales
• Managing purchases
• Cutting overheads

Increase sales

Existing loyal clients are far more valuable – and less expensive to service - than new clients. To increase sales in real terms - that is to keep existing clients coming ‘through the door’ and to maintain a respectable level of spend per ‘visit’ – the business should offer and promote services that bond clients with the business.

If the business has retail premises, the captive in-store audience can be targeted with regularly updated offers advertised through posters in key locations within the premises (i.e. point of sale, entry and exit points). Obvious, of course, but simple and effective examples.

Manage purchases

An owner has to keep purchases of products at sensible and pragmatic levels. They must avoid a build up of worthless or obsolete stock and review and compare supplier prices and reliability of service.

Most importantly, the present economic situation can be capitalised upon with suppliers – there is unlikely to be a better time to negotiate price reductions and attractive terms.

Cut overheads

By keeping a close eye on all overheads, using and reviewing management information on a frequent and regular basis and highlighting any expenses that are becoming disproportionately high in relation to the level of business income – i.e. watching the Cost Ratio (Overheads/Sales) – a business owner can drive down their overhead costs.

Manage the business

A business must be effectively run - budgeting and cash flow managed consistently. Ideally, the owner and a significant proportion of the payroll will be fee earners, and unnecessary management or administration bloat avoided.

If the premises are leasehold, advice should be sought over rent reviews and lease terms. Every expense can be covered- even utility suppliers can be reviewed and compared for best prices.

Be realistic about the business's value

The value of a business should not but be underestimated but should also be realistic. Beware valuation figures artificially inflated by a transfer agent eager to sign up a business to a sole agency agreement – potential buyers will recognise an over-priced business for what it is.

Advice should be sought from a professional valuer familiar with the industry – never guesswork. A specialist valuer can usually save (or make) a business owner a considerable amount of money.

Be a professional manager

Are you in this situation? If so, concentrate on the points listed above. Enlist professional help to organise and plan. Listen to the experts. Most importantly, be prepared with clear, up-to-date accounts showing an attractive and well documented track record of profitable growth.

Like the homeowner, polish and a fresh coat of paint will help with the kerb appeal. But remember that the bank will want to see that any potential buyer will be buying something well placed to pay back a loan.

Ultimately, it all comes down to profit. Get all of the above right and the financial figures will speak for themselves.

Mark Ridout is a business valuation specialist and director of RA Valuation Services who has written numerous published articles - as well as consulting prospective business owners - on buying a business and maximising the value of a business pre-sale