If your ultimate goal is to sell your company, you want to focus a bit on your company value. This blog will help with some tips to increase your company’s value.
How is Company Value Calculated?
Although there is no set rule on calculating company value, conceptually, they’re all basically the same. Ultimately, the value of your company is its assets minus its liabilities. However, nothing is ever that simple! There are a multitude of different assets in your company. These include intellectual property, tangible assets, future cash flow, and more. We covered using intellectual property to increase your value in this previous blog.
The most clear cut way to increase value is to increase assets. Obviously, a move valuable asset sells for more. You can also take steps to increase your asset value if any of your assets can be improved. For example, a fresh coat of paint on a building generally increases the value of that building. Increasing your intellectual property assets can be a quick improvement.
Future Cash Flows
Although it is considered an asset, one exceptional way to increase your value is to increase future cash flows. Reoccurring revenue is a valuable asset to potential buyers. You can increase this with more or larger subscriptions and contracts over time. For example, if you have a client that regularly hires you, you can increase your value by getting that client in a multiyear contract.
Lower Your Costs
On the liabilities side, if you lower your expenses, the overall value will increase. At least a few years before you sell, you should examine your monthly and yearly expenses to see what can be cut. The leaner the company, the higher the value.
What Company Value Can You Prove?
When calculating value, you only get credit for those things you can prove. Therefore, if you have any handshake deals, get them in writing immediately. You should also have a record of all company assets. It is harder to prove intangible assets like intellectual property, so you should have more thorough records for those.
Documentation not only helps for proving assets, it also helps increase your company value on its own. Buyers are more reluctant to purchase companies with messy or incomplete records. Therefore, if you have thorough and organized records, you see a smaller discount due to risk. Your documentation may also help ensure you don’t miss something of value. I’ve seen many instances where assets weren’t listed until the very end of a deal when they’re finally discovered. This does not inspire confidence in the deal.
Legal and Company Value
Just mentioning the word “legal” lowers your value. Just kidding! Good legal systems are similar to documentation. Having a record of any and all complaints or threatened legal action can help move that portion along when it comes up. Furthermore, if you have a system for keeping track of contracts, your buyer will be far more confident in the sale. If you can increase your buyer’s confidence, you can increase your buyer’s offer.
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