What is Driving the Value of my Business?
As a business owner, it is important to consider the forces that drive the value of your business up (or down). Exploring these factors will help you focus on doing more of the good things that will allow your business value to grow in the right direction!
One factor is COMPETITIVE ADVANTAGE. Overall business value is increased by the components that make your business special. Is it having a really cool product or simply a good product but at a lesser price? Are all things equal with your competition except that you provide phenomenal customer service? It can be as simple as having better parking or easier access. At the end of the day, there are a finite number of patrons to your business. Showing patrons the reason to visit your store versus your competitors’ will translate into greater cash flows; and consequently greater value.
Having a superior REPUTATION will also surge value. Businesses that have repeat customers and free word-of-mouth advertising are generally more successful. The businesses that have the phone ring or door open simply because “Jane said you are the best” will lend themselves to lower advertising costs, greater cash flows, satisfied customers and employees and typically a sustained longevity in the business.
Another force driving up business value is having enforceable NON-COMPETE AGREEMENTS with key employees. Of course it depends on the type of business, but these agreements are most important for those businesses that thrive on the relationships that key employees have formed with top-tier customers. Although they may be difficult to enforce, the employees who have signed non-compete agreements may think twice about leaving your business to put up their own shingle and pilfer your customers in the process. Another way to combat this risk is to offer a small OWNERSHIP interest in your company. What better way to entice your key employees to work harder and deepen customer relationships than to make him/her a part owner?! It conveys your trust and loyalty to the employee which will likely be reciprocated tenfold. Moreover, a partner can be bound to a non-compete commitment as part of a buy-sell agreement.
Of course reducing RISKS and optimizing strengths and opportunities are sure-fire ways to increase overall business value. Stay tuned to the next publication of The KT Addition to read more about risk, business valuation and strategic planning!
Do you or your clients have Business Valuation questions? Call the KTLLP Business Valuation Team today for answers. This is the second in the series of Business Valuation Strategic Planning articles. Watch for the rest of the series in upcoming KT Addition newsletters.