Working to increase the value of a small business is often an integral part of one’s business strategy. Whether we are working towards funding current growth, a future profitable sale, or company acquisition, value is key.
These strategies for increasing value should not only drive profits and see you moving forward from being a small business but will open up the opportunity for a valuable sale should you want to move on in the future.
By working towards increasing the value of your business, you are strengthening the prospect of having a significant financial reward available to you upon its sale. Whether this is in the pipeline or still many years away, it will only benefit you to start to increase your business’s value in the meantime.
How is increased value different from growth?
Increased value and business growth go hand in hand. They both work to a similar goal but achieve different results, typically differing in terms of business profit and resale profitability.
When we think about long-term growth, we think about all aspects of a business that can improve. Maybe this is growth in online presence or a premises expansion — this is a hugely positive step for a business — but this type of growth may not necessarily pull a profit.
Value, on the other hand, works almost solely to increase current profits and prospective profit in regards to a future sale or acquisition. When you specifically work to increase the value of your business, you are actively promoting a profitable future based on your valuation.
How to increase the value of your business
Here are 5 key areas that you should focus on when working to increase the value of your small business.
1. Find and understand your business’s current value
If you can easily understand the details of your current business and where your value lies. Focus on key growth areas, sales performance, and future financial projections to more accurately and effectively plan your strategies. This, in turn, will help you maintain and hopefully improve your business’s value in the long run.
This should be a given for any business but is particularly useful for small businesses with room to grow. Understanding current value gives you a baseline to work with and makes it far easier to budget and gauge performance over time.
What determines business value?
When a business is looking to sell, merge with or acquire a company, they will need an accurate measurement of their current business value. A business valuation, conducted by an appraiser, will seek to determine the fair economic value of a business. Some of the key features that determine business value include:
- Financial health—capital structure, cash flow, revenue, and profit.
- Future financial prospects
- Owned assets
- Market value
- Book value
Having a cohesive business plan, that documents the financial elements and strategy of your business can be invaluable for achieving the best valuation possible. You’ll likely need a full business plan that includes an exit plan alongside the other key components that showcase your business. But, to showcase your current position and how you’re making active adjustments, a Lean Plan may be more appropriate.
Why do I need to know the value of my small business?
You’ll need to understand the value of your business for a number of reasons, including:
- To track your growth and prove that any changes or improvements have been successful
- To attract or retain investors
- If you are trying to secure a business loan
- When you are planning on selling your business
Ensuring that you can track the growth of your business and that you are able to prove your current value is crucial to future success. This will also help you to understand where you can improve and how you might be able to do this, thus providing you with value. There are free business valuation tools online that can help you with this.
2. Become a leader in your niche
For a small business, finding and maintaining your niche is key. This enables you to create an effective plan that works for your type of business and allows you to learn from similar businesses, implementing strategies that have been proven to provide benefit and value.
Most established businesses, if not all, will have decided upon their target market and will tailor their business practices to best attract and suit this target. While younger businesses may be looking to gain a foothold, more established businesses need to focus on becoming industry leaders.
Typically, attempting to cater to multiple different markets will lead to less security in your industry. Always find your unique selling point (USP), focus on where your strengths as a business lie, and act in accordance with these elements. Make sure that those who need to be aware of your value can see this clearly and narrow your focus to which portion of the market is actually attainable.
3. Aim to improve your cash flow
Improving your cash flow will not only benefit you in both the short and long term but will also help strengthen the health of your business for future investors or buyers. It may seem hasty to consider planning for a future sale or investment, but by doing so early, you limit the chances of struggling with profit in years to come.
An investor or buyer will usually want a business with positive cash flow that looks as though it is set to increase over the following years. If you are experiencing a steady improvement and increase in cash flow and can document this clearly, you increase your chances of securing investors and attracting buyers. On the flip side, if you’re struggling with cash flow, you can look for areas to improve, still strengthening your overall position.
How can I improve cash flow in my small business?
Understanding how you can improve cash flow in your business is an important factor, especially in the early stages of a business. Starting off positively reduces the chances of you experiencing financial troubles in the future.
Some basic points to focus on that may help improve cash flow could include:
- Leasing equipment and machinery in the early stages as opposed to outright buying.
- Conducting thorough and consistent inventory checks.
- Conducting customer credit checks and ensuring that invoices are paid within a relatively short period of time, and chasing those that aren’t.
- Cutting down on non-essential expenditure and tracking the difference that doing this makes.
These are just a few ways in which a small business can start to improve its cash flow. Eliminating risk before problems can occur should be a key strategy for businesses of all sizes.
4. Attract a diverse customer base
A diverse customer base means that you can successfully cater to a diverse range of people. Doing so, while not alienating your core market, will provide more chances of securing customers through different sales channels and with different needs.
Having a diverse customer base also helps to limit a buyer’s concern regarding your customers’ loyalties being based on you being the current owner. If you have a small range of customers that make up a significant portion of your income, a buyer may worry that a change of hands may result in the loss of high-value customers.
Keep your range of customers varied and expansive in order to appeal to future buyers and ensure customer security should you seek to make changes.
5. Focus on your customer service
Following on from above, you’ll want to keep your diverse range of customers happy. This may seem obvious, but retaining long-standing customers will be hugely beneficial for your small business and can provide you with more benefits than one-off customers will.
You can always improve your processes to better benefit the customer. If you understand your customers, document their needs, and evaluate why they choose to use your business, you can form a better overall relationship and use this knowledge to implement winning strategies.
Further into the future, if a sale is being considered, these relationships can be documented and easily maintained by future buyers, which massively increases your business’s value potential.
Additional increased value methods
It’s very likely that your business will currently be somewhat profitable at some point. This means that there is value in what you have already done. Paying close attention to your recurring revenue streams means that you can identify repeatable areas as well as single out areas for improvement.
Focus on showcasing where you’ve repeatedly driven value during the valuation process. For example, if you promote business scalability and can prove that this is set to increase based on historical patterns, it’s a safer bet for buyers. They know another windfall is coming and can recoup some of their investment.
Each and every success you see in your business highlights current value. This is where increased value and growth go hand-in-hand. Proving and promoting business value whilst showcasing accurate business growth projections will together display and encourage financial increase.
Understanding business value is key to current and future success
There are plenty of ways in which you can help to increase the value of your business. If you always keep future business value in mind, you’ll increase your chances of future success with investors and buyers whilst driving current profits for your small business.
Keep in mind, not every strategy will be feasible for every small business. Some of the examples in this list require you to be in a growth stage to implement successfully. Others are best suited for businesses solidifying their position. The key takeaway from these tips is to ensure that you consider how your actions will increase the value of your business wherever you can.