10 ways to increase your firm's value - Net Worth

Nation's Business, Nov, 1996

When you want to borrow money for your business, transfer your company to heirs, or sell your firm outright, you need to know its value. Many owners think that value is simply a multiple of earnings, but it's far more than that.

Perhaps the best way to understand value is to look at your business from the perspective of a potential buyer, according to Howard Hecht and William Downey, principals with Green Park Development Resources Inc., a mergers and acquisitions company in Port Washington, N.Y.

By thinking like a buyer, they say, you can see more clearly the key characteristics that influence a business's value. Here are 10 characteristics that they say are the most important:

1. Develop Proprietary Products

Technology, design, and even packaging can make your products proprietary, can lead to higher profits, and may increase your desirability from the buyer's standpoint. Proprietary products offer protection from competition and enable companies to sell on much more than just price. It's important to make sure that your customers perceive a differentiation.

2. Serve Niche Markets

Trying to be everything to everyone in a major market can blur a company's image and expose it to harsh competition. Instead, position the company as a market leader.

In good markets, you're often better off owning 60 percent of a niche than 1 percent of the broader market. "Niche players have a sharp focus on specific types of customers, know them in minute detail, and can therefore offer them superior expertise, service, and products," Hecht and Downey wrote in a recent article.

3. Sell Consumable Products

With consumable products, your first sale marks the beginning of a stream of sales. Reorders are automatic, and you don't have a high customer turnover each year. Buyers of businesses look for companies that attract repeat customers because such firms have predictable sales.

4. Build An Organization

A business that depends on only one or two people is riskier in the buyer's mind, and therefore is of less value. "Buyers don't like one-man bands," said Downey and Hecht. Building a deeper management team means you must relinquish some control, it's also more expensive and involves risk. The payoff, however, is not only better operating results, but a higher sales price, they wrote.

5. Beware Of The Size Issue

Larger businesses are often stronger than smaller ones. They may offer better market share, broader product lines, multiple locations, more assets, deeper management, and greater capabilities.

Recognizing this, buyers often set minimum sales sizes for acquisitions and, everything else being equal, tend to pay higher multiples for companies with higher sales.

The experts warn, however, that size can hurt. When the goal is market share, or simply size, profits are often sacrificed. The resulting high working-capital needs can lead to strained finances. More debt means higher risk. Larger businesses are often more complex and harder to manage.

6. Maintain Credible Financial Statements

Financial statements provide a record of the results of a company's operations and a statement of assets and liabilities. Many buyers are turned off by foggy financials. A buyer loses faith in a company's credibility if he can't understand and have a high degree of confidence in its reports.

7. Develop A Broad Customer Base

Degree of risk is a major factor in a buyer's purchase price. A business with a multitude of independent customers is generally more predictable and represents a lower risk than a similar business that depends heavily on one or a handful of major customers.

8. Steadily Increase Sales And Profits

When purchasing a company, the buyer makes a judgment as to what he can earn on his investment. Projecting results for a company with historical sawtooth peaks and valleys in sales and profits is very difficult; accordingly, buyers will devalue such a company s results.

9. Lower Debt Higher Book Value = Higher Price

Debt outstanding at the closing is often deducted from the gross purchase price to determine the amount the sellers actually receive. Many businesses are nearly impossible to sell for any net price that is reasonable to the owner because the debt exceeds the gross value of the business, according to the experts.

A business may be in such a situation because of distributions to the owner, the business consuming too much working capital, high fixed assets relative to earnings, an acquisition, a recent expansion, or simply being undercapitalized. Higher book values (stockholderst equity) act as a positive in a buyer's assessment of purchase price, to some extent providing at least the illusion of a floor in value.

10. Be A Player In A Major Market

A company with a proprietary product in a small market is unlikely to be in high demand among those who would pay higher prices for synergy. Said Hecht and Downey: "To get a big price, you need to interest purchasers who have big money."