In order to effectively increase the value of your business, you first need to understand how business valuations work, and then target the areas that need improvement. Many business owners have ambitious plans of selling their businesses for a big profit, but aren’t aware of the key areas that can allow them to demand a higher asking price. Not all parts of a business that contribute to value can easily be altered or improved, but there are a few that you can start taking action on immediately.

Get Your Books in Order

Organizing your financial statements is a key component of preparing your business for sale and one of the easiest ways to improve its value. Keeping track of expenses and maintaining complete bookkeeping allows you to pull financial statements for an interested buyer on demand. Staying on top of your books regularly also allows you to see where each dollar in your business is going, which can help you to increase its value and raise your profits. Maintaining a firm grasp on your income and expenses also allows you to see areas for improvement, including lowering expenses and negotiating vendor contracts.

When it comes to expenses, if you are running personal items through the business, you will need to stop. While this might help with your income taxes, it will lower the value of your business. When someone does a valuation on your business, they will identify any personal expenses and add them back into your bottom line. However, many banks will not accept these “add-backs”, which will lower your seller discretionary earnings. This will not only affect the value of the business, but also the debt-to-service ratio. Banks look at this ratio to determine if the net profits from the business can pay a livable wage to the owner. Expensing personal items can drastically reduce the value of your company, so it is best to avoid it.

Diversify Your Revenue Streams

Relying on one product or one customer to keep your business running successfully is not a good thing. It’s not only a big risk for potential buyers, it’s a big risk for you. Selling more than one product or service gives a buyer some reassurance that there will still be some stability if something is discontinued or disrupted. Similarly, if a disproportionate amount of your revenue depends on one company or individual, you need to work on growing your customer base. Similarly, if you have an overall small number of customers, you should focus on finding more. This will increase your income diversity, and subsequently the company’s value and profitability.

Establish Recurring Revenue

Any form of recurring revenue is better than one-time revenue. Business brokers and valuation experts use valuation multiples to determine the fair market valuation for your business. Recurring revenue can increase the valuation multiple, thereby increasing the value of your business. Regularly recurring income also looks more attractive to a buyer. If your business model doesn’t allow for subscriptions or contracts that can boost recurring income, figure out how you can use an incentive or rewards program to increase your number of repeat customers.

Get to Know Your Numbers

Imagine a buyer asking you for details about your business, such as your competitors, year to year growth or the health of your industry, and you are unable to provide the answer right away. Being able to answer these questions quickly shows that you know your business inside and out. Make sure you also have a firm grasp on external factors that could affect your business or industry. Use that information to make informed future projections about your business. This will help buyers to not only see how your company has performed historically, but also where it is heading. Buyers are looking for businesses with growth potential, so it is a big factor in your business’s value.

Get Receivables Under Control

Taking too long to send out invoices or collect on your receivables could hurt your ability to sell your business. This is because buyers have to write a separate check to fund operating expenses when they purchase a business. If you float your receivables for 60 days or more, it limits the ability of the buyer to supply enough working capital to fund business operations and payroll. Even if you aren’t actively trying to sell your business, this could hurt your cash flow. While many small businesses do not employ a full-time bookkeeper, and contract out their accounting, maintaining short terms on receivables can help keep this under control.

Running a successful business, and focusing on growth will help you to build a high-value company, but no business is perfect and there are always areas to improve. Learn and effectively manage all of the financial aspects of your business. It will not only help your business sell for a higher price, but also prosper while you own it.

If you own a business in Southwest Florida and are looking for more ways to increase its value, or need help putting these tips into action, contact Corporate Investment Business Brokers (CIBB) in Fort Myers. Our team of business valuation experts will help you to begin the process of selling with a free valuation estimate.