What’s reducing the value of your business?

It’s fair to say that this isn’t the first thing a business owner is likely to think about every day. This is particularly true in the SME sector, especially in owner-managed businesses. The business ticks along, growing steadily and providing a good lifestyle. Often it’s only when the owners decide either to raise investment or to sell the business that they realise that their company is very unlikely to achieve the level of investment or the sale price they had hoped for. That’s news that no-one wants to hear!

If you are planning to sell up it’s almost certain that your price expectation will be higher than a buyers. But that gap will be much greater if you haven’t recognised and dealt with those elements of the business that detract from its value. In fact, the earlier this is known the better as it allows time to make changes.

Yes, of course the business needs to be making a profit and showing further potential to grow. That’s a given. But many business owners are at risk of devaluing their companies simply by continuing to run the business as they’ve always done, without considering what it would look like in the hands of a new owner.

So if you want to avoid value detractors try looking at your business as if you were a buyer. Which of these factors apply to your business?

1. High levels of dependence upon the owner and no management team

2. High levels of customer concentration

3. Incomplete, out of date or non-existent employee contracts

4. Poorly kept, non-GAAP compliant financial statements

5. Low levels of profitability (relative to industry comparable percentages)

6. No documented business plan or defined strategy for growth

7. Incomplete or non-existent sales and marketing plans

8. Incomplete or non-existent processes and procedures

9. Out of date IT systems open to risk of cybercrime

10. Disorganised and unprofessional working environment

Each of the above equals risk and buyers/investors will discount accordingly.

You may think that these risks only apply if you were looking for investment or exit but consider a couple of “What If” scenarios:

What if you become incapacitated for some reason – no one is running the business, making critical decisions or bringing in new business. 

What if your top 2 clients leave unexpectedly – this happened recently to a business I know causing substantial damage.

What if the company’s IT systems suffer a cyber-attack because your systems haven’t been updated – the damage could be vast; I am aware of 2 SME’s that suffered serious business loss through cybercrime and just look at the damage caused by the recent attack on the NHS!

What if an employee trips and injures themselves because of a poor working environment and then makes a claim against you? Health and Safety inspection looms!

Time pressed owner-managers find it hard to find the time to take a fresh look at their companies. Some are aware of the risks within the business but accept them in the hope that the worst will never happen. But not being aware of them and not dealing with them will reduce the value of your business.  

Just about all of these value detractors can be fixed within 3 years and some of them within a year at little cost. Tackling these will help your business to thrive and be more likely to attract investment capital or your desired sale price if that’s on your agenda.

Find out more about what how businesses are valued at a free Evolution CBS Masterclass.

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