5 Simple Ways to Increase Your Business Value

Last week we explored business valuation. A common approach is to use comps. Comps look at the selling prices of other businesses that are in your peer group. To use comps effectively to generate a valuation that is meaningful access to good data is important. We want to use comps that are relevant to your business.

When using comps to determine your valuation there are two pieces of data needed – your financials (i.e. profitability) and the multiple, or comp. Good comps require familiarity with both the selling price as well as the profitability of the business.

In general, multiples tend to be set by the market. In a seller’s market multiples increase. In a buyer’s market they decrease. There are things you can do to that may increase your multiple like building scale or investing and training and technology. But in general, the primary way to increase the value of your business is to improve your financials (subscribers: email me to discuss some of the ways we can help substantially increase your valuation by improving both your profit and multiple).

Here are five simple ways to increase your business value.

1.     Focus on Gross Profit

Small changes in gross profit can have a large impact on your bottom line. Gross profit is the primary driver of profitability in a business. Declines in gross profit can occur slowly over time, causing the business to underperform relative to peers. If your business is underperforming, not only will your profitability suffer, but likely your relative valuation will take a hit as well.

2.     Keep your Overhead and SGA in check

When selling a business, sellers often attempt to back out a whole slew of expenses to justify higher profitability, and a higher sales price. But most sophisticated buyers are naturally skeptical of these adjustments. Expecting to “adjust your way to profitability” will impact your credibility and cause buyers to question other aspects of your business. Maximize your value the old fashioned way – keep an eye on your overhead expenses.

3.     Manage your WIP and Inventory

Don’t forget about the expenses that do not show up on your monthly P&L. Inventory and WIP do not hit the P&L (unless you have a write down which is rare in the collision industry). Instead they show up on your balance sheet.  But these items consume cash. Lots of cash if not managed closely. WIP is money you have paid to work on cars that you have not yet recognized as a sale. The more cars in process the less cash you have available for other uses, like paying yourself. Excessive WIP drains your cash. Ultimately valuation is about cash flow, not profit. The greater your cash flow the greater your valuation.

4.     Dive into Working Capital

Working capital is the cash that your business needs to operate on a day to day basis. It is the cash that your business has tied up in inventory and WIP, accounts payables, and accounts receivables. Working capital does not show up on the P&L either. But poor working capital management can bankrupt even the largest companies. The most profitable companies in the world actively manage working capital.

5.     Use a Dashboard

A financial dashboard is the easiest way to ensure that you are looking at these numbers every month. It is also the best way to eliminate surprises while building a profitable and valuable company. A dashboard allows you to find lost cash in your business. It allows you to zero in on specific areas that need improvement. In short, a dashboard acts as a roadmap to improve the profitability and cash flow of your business.

We developed a simple financial dashboard that automatically manages all of these areas. But what we are really excited about is that the dashboard uses images and graphs, rather than numbers. You see trends instantly. When gross profit declines, or AR increases, you can see it instantly. Not only that, our dashboard quantifies the exact dollar amount of those changes.

Our vision is to make finance simple. If you want to extract more cash from your business a dashboard might be right for you. Click on the link to go to our dashboard page. Click Sign Up to see the handful of plans you can choose from. We’re also offering a special very short term promotion to lower the cost even more for subscribers that sign up before Friday at midnight. Just use the code SUPP at checkout. Best of all, if you sign up and later realize this does not work for you, no problem. We have a 30 day no questions asked full refund policy as well.

We really are excited about the ease and high level of insight this brings to your financials. My goal is to increase the value of your business. Everything we do at Supplement is designed with that in mind. In an industry of increased complexity and decreasing margins, financial oversight is increasingly important. There are lots of ways to increase the value of your business, from expanding and acquiring another location, merging with another business or understanding how to best finance equipment purchases and facility upgrades. But all of those options require a laser like focus on your profitability.

Regardless of what is right for you, we are here to help you.

Until next week.