Build It. Grow It. Know Its Value: How to Build a More Valuable Business
By Bruce Pockrandt, CBI
Managing Broker, Truforte Business Group
Helping Florida business owners understand, build and maximize the value of their businesses.
Key Takeaways: How to Build a More Valuable Business
A more valuable business is typically one that can produce consistent earnings, operate without excessive dependence on the owner, retain customers and employees, and successfully transfer to new ownership.
Business owners looking to increase the value and marketability of their company should focus on:
- Consistent profitability: Buyers want confidence that earnings are sustainable.
- Recurring revenue: Contracts, maintenance agreements and repeat customers can make future revenue more predictable.
- Reduced owner dependence: A business that can operate successfully without the owner involved in every decision may be easier to transfer.
- Clean financial records: Buyers and lenders need reliable financial information to verify business performance.
- Customer diversification: Dependence on one or two major customers can increase risk.
- A strong management team: Experienced employees and managers can help the business continue operating after a sale.
- Documented systems: Repeatable processes make knowledge and operations easier to transfer to a new owner.
- A strong reputation: Brand recognition, customer reviews and market presence can contribute to a company’s marketability.
- Early exit planning: Identifying weaknesses several years before a sale gives an owner more time to address them.
- Knowing the business’s value: A business valuation can establish a benchmark and help an owner identify opportunities to build future value.
The best time to start building a more valuable business is before you’re ready to sell. Many of the same improvements that can make a company more attractive to future buyers can also make it stronger, more profitable and easier to operate today.
Most business owners spend years focused on one primary goal: growing the business.
They work to increase sales, serve customers, hire employees, manage expenses, solve problems and generate profits.
But there is another question every business owner should be asking:
Am I building a business that someone else would eventually want to buy?
A profitable business and a valuable business are not always the same thing.
Two companies can generate similar revenue and profits yet have significantly different values in the marketplace. The difference often comes down to the quality of the business behind the numbers.
At Truforte Business Group, we encourage business owners to think about value long before they are ready to sell.
The philosophy is simple:
Build It. Grow It. Know Its Value.
Whether you plan to sell your business next year, five years from now, or have no immediate plans to sell at all, understanding what drives business value can help you build a stronger company today.
How Do You Increase the Value of a Business?
A business owner can potentially increase the value of a business by improving profitability, developing recurring revenue, reducing dependence on the owner, creating documented systems, maintaining accurate financial records, building a strong management team and diversifying the customer base.
In general, buyers want confidence that the company’s earnings and operations can continue after the current owner leaves.
That makes predictability, transferability and sustainability important considerations when building a more valuable business.
Here are 10 areas business owners should consider.
1. Build a Business That Doesn’t Depend Entirely on You
One of the biggest challenges we see when evaluating privately held businesses is owner dependence.
Many entrepreneurs have built successful companies because they are exceptionally good at what they do.
The problem occurs when the owner becomes the business.
If every major customer calls the owner, every employee reports directly to the owner, every important decision requires the owner and sales depend heavily on the owner’s personal relationships, a prospective buyer may wonder:
What happens when the owner leaves?
That question can directly affect how a buyer views risk and transferability.
A business that can operate successfully without the owner being involved in every daily decision may be more attractive to prospective buyers.
Business owners can begin reducing owner dependence by:
- Delegating operational responsibilities
- Developing managers and key employees
- Documenting important processes
- Creating standardized procedures
- Moving customer relationships from the owner to the company
- Establishing systems for sales, operations, accounting and customer service
The goal isn’t necessarily to remove yourself completely from your business.
The goal is to build a company that doesn’t depend entirely on you.
2. Focus on Consistent, Sustainable Profitability
Revenue is important, but buyers typically pay close attention to cash flow and earnings.
A company generating $5 million in revenue with thin or inconsistent profits may be viewed differently than a smaller company producing strong, predictable cash flow.
Buyers want to understand the economic benefit the business provides to its owner and whether that benefit is likely to continue.
For many small and lower-middle-market businesses, valuation discussions may involve Seller’s Discretionary Earnings (SDE) or EBITDA, depending on the size and structure of the company.
Buyers may examine several years of financial performance and ask:
- Are sales increasing or decreasing?
- Are margins improving?
- Are earnings consistent?
- Are expenses under control?
- Are recent results sustainable?
A business showing predictable financial performance may give buyers greater confidence than one experiencing dramatic swings from year to year.
3. Develop Recurring and Predictable Revenue
Predictability can be extremely important to a prospective buyer.
Consider two businesses producing similar annual revenue and profits.
Company A must find new customers every month to replace completed projects.
Company B begins each month with customers already under maintenance agreements, service contracts or other recurring arrangements.
Which business gives a prospective buyer greater visibility into next month’s revenue?
Recurring revenue can take many forms depending on the industry, including:
- Maintenance agreements
- Service contracts
- Membership programs
- Subscription revenue
- Monitoring agreements
- Repeat commercial accounts
- Scheduled maintenance programs
- Long-term customer relationships
HVAC companies, landscaping businesses, cleaning companies, technology firms, healthcare companies, pest-control businesses and many other industries can potentially develop some form of repeat or recurring revenue.
The more predictable tomorrow’s revenue becomes, the easier it may be for a prospective buyer to evaluate the future earning potential of the business.
4. Keep Clean, Accurate Financial Records
You may know your business is profitable.
A prospective buyer — and often the buyer’s lender — needs to be able to verify it.
Clean financial records can play an important role when selling a business.
During the sale process, buyers may want to review items such as:
- Business tax returns
- Profit-and-loss statements
- Balance sheets
- Payroll information
- Bank statements
- Accounts receivable
- Accounts payable
- Equipment schedules
- Other financial records relevant to the business
Poor bookkeeping can create uncertainty.
And uncertainty can create risk.
If the financial statements do not clearly demonstrate the company’s performance, a buyer may discount earnings, request additional documentation or become hesitant about proceeding.
Business owners thinking about selling within the next several years should consider working with their accountant or CPA to make sure their financial records accurately reflect the company’s performance.
5. Reduce Customer Concentration
Imagine a business generating $4 million in annual revenue.
Now imagine that one customer represents $2 million of that revenue.
The business may be profitable, but a prospective buyer is likely to ask:
What happens if that customer leaves?
Customer concentration can create additional risk.
The same issue can occur when just a few customers represent a large percentage of total revenue.
Business owners can work toward greater diversification by:
- Expanding marketing efforts
- Entering additional markets
- Developing new customer relationships
- Adding complementary services
- Building additional sales channels
- Reducing reliance on a handful of major accounts
This doesn’t mean large customers are bad. Major accounts can be extremely valuable.
The concern is excessive dependence on any one customer or small group of customers.
6. Build a Strong Team
Prospective buyers aren’t simply evaluating financial statements.
They are often evaluating an organization.
Experienced employees, managers, technicians, salespeople and administrators can make a business easier to transfer to new ownership.
Ask yourself:
Who could run my business if I were gone for 30 days?
Then consider:
- Who maintains the key customer relationships?
- Who understands the operational systems?
- Who manages employees?
- Who handles sales?
- Who understands the financial side of the company?
- Who can make important decisions when the owner isn’t available?
If the answer to every question is the owner, there may be an opportunity to strengthen the organization.
Developing a capable team doesn’t just help prepare a company for an eventual sale. It can also give the current owner more freedom today.
7. Create Documented Systems and Processes
Many successful entrepreneurs carry enormous amounts of information in their heads.
They know how to quote jobs, handle customers, solve problems, manage employees, purchase inventory and operate the company.
But a prospective buyer can’t purchase what exists only in the seller’s memory.
Documented systems make knowledge more transferable.
Consider documenting processes involving:
- Sales
- Customer onboarding
- Employee training
- Purchasing
- Inventory management
- Quality control
- Customer service
- Accounting
- Marketing
- Vendor relationships
- Daily operations
Standard operating procedures can also make it easier to train employees and maintain consistency.
The objective is to turn knowledge into a repeatable business system that can continue under new ownership.
8. Build Your Brand and Online Reputation
A company’s digital reputation can also become part of what a prospective buyer evaluates.
Before purchasing a business, buyers may research:
- Google reviews
- The company’s website
- Search engine visibility
- Social media presence
- Customer comments
- Industry reviews
- Digital marketing
- Brand recognition
A company with an established reputation and strong market presence can give a new owner something valuable: momentum.
Rather than starting from scratch, the buyer may be acquiring a recognized name, existing customer relationships and an established position in the marketplace.
9. Identify Problems Before a Buyer Does
One of the best times to discover a potential problem with your business is before you put it on the market.
Issues that can complicate a business sale may include:
- Expiring leases
- Undocumented employee arrangements
- Customer concentration
- Outdated equipment
- Licensing or regulatory issues
- Unresolved legal matters
- Poor financial records
- Excessive owner dependence
- Weak management
- Declining sales
- Supplier concentration
Once the business is on the market, these issues may surface during buyer due diligence.
Identifying them early gives the owner time to determine whether they can be corrected or reduced before going to market.
10. Know What Your Business Is Worth
One of the biggest mistakes business owners can make is waiting until they are ready to sell before asking:
What is my business worth?
Understanding the approximate market value of your business can be useful even if you have no intention of selling today.
Think of a business valuation as a benchmark.
Once you have a better understanding of where your business stands today, you can begin identifying areas that may improve its future value.
Depending on the business, a valuation may consider factors such as:
- Revenue
- Earnings
- Seller’s Discretionary Earnings
- EBITDA
- Industry
- Growth trends
- Assets
- Customer concentration
- Recurring revenue
- Owner involvement
- Management structure
- Market conditions
- Comparable business sales
- Overall risk
There is rarely one simple formula that applies equally to every business.
A company’s value ultimately depends on its financial performance, risk characteristics, industry, transferability and what qualified buyers may be willing to pay in the marketplace.
What Makes a Business Attractive to Buyers?
While every buyer and every transaction is different, buyers generally want to understand three fundamental things:
Can the business continue making money?
Can the business successfully transfer to a new owner?
What risks could prevent that from happening?
This is why revenue alone doesn’t tell the complete story.
A business with strong cash flow, recurring customers, good employees, documented processes, clean financial records and limited owner dependence may present a very different opportunity from a business with the same revenue but significant operational risk.
When Should You Start Preparing a Business for Sale?
Ideally, preparing a business for an eventual sale begins before the owner is ready to sell.
Waiting until you want to retire or exit can limit the amount of time available to make meaningful improvements.
Starting several years in advance may provide time to strengthen earnings, reduce owner dependence, develop employees, improve financial records, diversify customers and build recurring revenue.
Even if you ultimately decide not to sell, many of these improvements can result in a stronger and easier-to-manage company.
Build It Today. Sell It When the Time Is Right.
You don’t need to be ready to sell your business to start preparing for the possibility.
In fact, some of the best improvements an owner can make before selling are also improvements that create a better business to own today.
Better systems can mean fewer headaches.
Better employees can mean more freedom.
Recurring revenue can improve predictability.
Better financial reporting can improve decision-making.
A diversified customer base can reduce risk.
And understanding your business’s value can give you a clearer picture of what may be one of your largest financial assets.
That is the idea behind:
Build It. Grow It. Know Its Value.
Build a strong business.
Grow it strategically.
Know what makes it valuable.
Then, when the time eventually comes to sell, you can be better prepared for the process.
Frequently Asked Questions About Increasing Business Value
What makes a business more valuable to a buyer?
Buyers may consider profitability, cash flow, growth, recurring revenue, customer concentration, owner dependence, employees, systems, financial records, industry conditions and the company’s ability to continue operating after the seller leaves. The importance of each factor varies by business and industry.
How can I increase the value of my business before selling?
Potential strategies include improving profitability, building recurring revenue, reducing owner dependence, diversifying the customer base, developing key employees, documenting operating procedures and maintaining accurate financial records.
How far in advance should I prepare my business for sale?
Starting several years before a potential sale can provide more time to make meaningful operational and financial improvements. However, even owners considering a sale in the near term can benefit from identifying issues that could affect marketability or value.
Does recurring revenue increase business value?
Recurring or predictable revenue can make a business attractive to buyers because it provides greater visibility into potential future revenue. Its actual effect on valuation depends on factors including profitability, customer retention, contract terms, industry and overall risk.
Does a business lose value if it depends heavily on the owner?
Heavy owner dependence can create additional risk for a prospective buyer. The buyer must determine whether customers, employees, knowledge, relationships and operations will successfully transfer after the seller leaves.
How is a Florida business valued?
Depending on the business, valuation may consider Seller’s Discretionary Earnings, EBITDA, assets, comparable transactions, industry multiples, growth trends, market conditions and risk factors. The appropriate valuation approach depends on the company’s size, industry and financial characteristics.
Should I get a business valuation if I’m not ready to sell?
A business valuation can provide a useful benchmark even when an owner isn’t ready to sell. Understanding the business’s current value can help identify areas for improvement and provide a basis for measuring progress over time.
Start by Knowing Where You Stand
If you have spent years building your business, there is a good chance it represents one of your most significant financial assets.
Yet many owners know the approximate value of their home, investment accounts and other assets while having only a rough idea of what their business may be worth.
You don’t have to be ready to sell to start the conversation.
At Truforte Business Group, we work with Florida business owners who are considering selling now as well as owners who may be several years away from an exit.
Understanding where your business stands today can help you make more informed decisions about where you want it to be tomorrow.
Build It. Grow It. Know Its Value.
To learn more about the value of your business or about selling a business in Florida, contact Truforte Business Group at 239-284-1317 or visit TruforteBusinessGroup.com.
About the Author
Bruce Pockrandt, CBI
Bruce Pockrandt, CBI, is Managing Broker of Truforte Business Group, a Florida business brokerage firm specializing in helping owners prepare for and navigate the confidential sale of privately held businesses.
Bruce is a Certified Business Intermediary (CBI) and is active in the business brokerage profession through organizations including the International Business Brokers Association (IBBA) and Business Brokers of Florida (BBF).
His experience in business sales, marketing, customer service, distribution, wholesale, retail and service businesses gives him a broad perspective on the factors that can affect the value, marketability and transferability of privately held businesses.
Through Truforte Business Group, Bruce and his team assist Florida business owners throughout the business-sale process, including business valuation, confidential marketing, buyer qualification, negotiations, due diligence and closing.
About Truforte Business Group
Truforte Business Group is a Florida business brokerage firm assisting business owners with the confidential sale of privately held businesses. Truforte works with business owners and prospective buyers throughout Florida.
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