It’s a lot easier to win money on a game show than to build and sell a great company, that’s for sure. Although both routes require an element of luck and skill, one takes 15 minutes and the other usually taking 15 years.
With so much time dedicated to building a company and eventually selling it, it makes sense to learn about how to maximise the value of a business. This is the concept of achieving “the best exit” – whether you sell down partially or completely.
1. When it comes to customers, more is more
Having a diversified revenue base is a wonderful way to reduce risk in a business.
If your entire livelihood depends on just one or two key contracts, then the business is much tougher to sell. Even if you do manage to sell it, the valuation will take a knock vs. a company that has a spread of customers.
A valuation is all about applying a multiple to each rand of value. Even with all else being equal (margins etc.), two companies with identical revenue numbers could sell at vastly different values depending on the underlying risk of the customer base.
Taking on unprofitable customers doesn’t help either, so don’t di-worsify instead of diversify. Having said that, any strategic plan should include tactics to bring in different sources of revenue from new customers.
2. Collect cash quickly and pay it out slowly
The discounted cash flow (DCF) valuation technique is all about the future cash flows that the business can generate. This approach is commonly used in the market for valuations of companies.
Aside from the obvious ways to improve the cash flow profile (like making more profit), there are other ways to improve the outcome of a DCF valuation.
The value is highly sensitive to changes in working capital. This refers to the level of inventory, debtors and creditors in the business. If cash gets tied up in stock or in debtors, then there is less available to shareholders. If creditors are paid too quickly, it puts pressure on cash flows.
It pays to make sure that cash is collected timeously from debtors. Apart from the obvious benefit of improving the liquidity of the business, it also increases the valuation. The same is true for taking longer to pay creditors.
When managing your cash flows, look for ways to accelerate debtor collections without giving away too much margin in the form of settlement discounts. It’s often easier to focus on the creditor side of your business, negotiating longer payment terms to help stretch your balance sheet.
It shouldn’t come as a surprise to you that techniques to increase the value of your business also create a stronger business along the way!
3. Fish where the fish are swimming – millionaire
Some sectors are hot and others simply aren’t. If you’re an exciting technology company with a global growth runway, then the valuation multiple you achieve is going to be a lot higher than an industrial group operating in just one country that has numerous challenges.
You can’t change your business overnight, of course. We aren’t suggesting that you should. All we are pointing out is that if you want the best possible exit, you need to consider which business sectors are on the rise and which are in terminal decline.
Your chosen sector has a substantial impact on your eventual wealth creation.
Put yourself on the scoreboard with bizval
When we built bizval, our dream was to create an online tool to help founders obtain high-quality valuations of their companies. The back-end calculation engine was built by The Finance Ghost and turned into a user-friendly tool by an experienced team of tech experts.
Valuations by professional services firms frequently cost $10,000 and more. Whilst our tool does have some limitations of course, we believe that the required investment of $130 per valuation offers incredible value to founders who want a strong indication of what the business is worth.
By managing for value at an earlier stage in your business journey, you stand a far better chance of achieving the ultimate exit in future. Through performing regular valuations of your business at an affordable rate, you are giving yourself a scoreboard to measure what really matters.
We’ve created a series of three podcasts that give you more information about the team behind bizval and why we believe this tool is so powerful for founders. We also discuss the concept of managing for value, along with more ideas about how to increase the value of your business.