Business Valuation Enhancement

Business value enhancement strategies generally influence valuation because of their perceived impact on risk, growth or profit margins. At the top of many buyer's list is the need to see a strong, experienced and motivated management in place.

For financial buyers, this often includes the need to be assured that management is in place. This also often includes the need to be assured that management has skin in the game, typically an equity interest. Improvements in profit margins are strongest when they are reflected in trailing (historical) earnings. More recently effected changes, or even planned changes, can also influence valuation. However, if the benefit of the changes can be quantified and demonstrated because of the multiplier effect built into earning-based valuations, a $1mm earnings improvement may increase the valuation by, say, $5mm.

It doesn't seem entirely logical that an exiting business owner would have unexplored opportunities available for making improvements to the business. It's a little like living with an outdated kitchen and upgrading just before selling the house. As in the real estate analogy, the stakes are higher at the time of exit, and the focus on marketability and valuation greater, so these opportunities often do exist. Other business value enhancement strategies include:

• Reviewing and revising the revenue and/or business models
• Implementing product/market enhancement plans
• Expanding and diversifying the customer base
• Securing title to patents and intellectual property
• Commissioning of financial and operational audits
• Strengthening or upgrading of systems and procedures
• Documenting or codifying contractual relationships (employees, vendors, customers, debt)