As an owner manager of a small or medium-sized enterprise (SME), increasing the value of your business is likely a key goal. Whether you plan to sell, attract investors, or simply strengthen your business’s position, enhancing value is crucial.
But where to start?
Understanding a common valuation method.
One of the most common methods of valuing a business is to multiply profits by a multiple.
The profits are measured by the EBITDA calculation that adds back; interest, tax, depreciation and amortisation (depreciation on intangible assets). Often if owners take a small salary and dividend the salary costs are added back and replaced by commercial salaries and unusual items that are one offs such as a large donation or bad debt are usually adjusted so the figure represents a “normalised” value.
Whilst the calculation of EBITDA is scientific the identification of the multiple is more subjective. For a long time people have said the multiple for an SME should just be x3 however, there are many factors to consider such as how robust the business is and how attractive the sector it operates in is.
With this in mind … enhancing business value can be approached from two perspectives: (1) increasing profits (EBITDA) and (2) strengthening the business so that it attracts a higher multiple.
Here’s an overview to help you navigate these paths.
1. Increasing Profits (EBITDA)
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation, is a key indicator of a company’s financial performance and a widely used metric in business valuation.
Here’s how you can boost your EBITDA:
Increase Revenue
- Diversify Products and Services: Expanding your product or service range can attract new customers and increase revenue. Consider adding complementary products or services that align with your current offerings.
- Develop Sales Strategies:Implement effective sales techniques, such as upselling and cross-selling, to increase average transaction values. Invest in sales training for your team to improve their performance.
- Expand Market Reach: Explore new markets, both geographically and demographically. Online sales channels can help you reach a broader audience without significant overhead costs.
Cost Management
- Control Operating Costs: Regularly review and analyse your operating expenses. Identify areas where you can cut costs without compromising quality. For example, negotiate better terms with suppliers or streamline your operations.
- Improve Efficiency: Invest in technology and automation to increase efficiency. Tools like CRM systems, accounting software, and project management apps can save time and reduce errors.
- Manage stock: Efficient stock management can reduce processing costs and minimise waste. Implement more efficient stock handling practices or use stock management software to track levels accurately.
Pricing Strategies
- Value-Based Pricing: Rather than competing solely on price, focus on the unique value your products or services offer. Customers are often willing to pay more for superior quality or service. Keeping prices in touch with inflation protects your gross profit margin.
- Regular Reviews: Regularly review your pricing strategy to ensure it reflects market conditions and costs. Don’t be afraid to adjust prices when necessary to maintain profitability.
2. Strengthening the Business
Beyond financial metrics, a strong, resilient business is inherently more valuable. Here’s how to fortify your SME:
Build a Strong Management Team
- Leadership Development: Invest in developing a capable and experienced team. Strong leadership can drive growth and innovation. Can the business run without you?
- Succession Planning: Prepare for the future by having a clear succession plan. This ensures business continuity and reassures potential buyers about the long-term stability of the company.
Enhance Operational Processes, Systems and Internal Controls
- Standardise Procedures: Develop and document standard operating procedures (SOPs) to ensure consistency and quality. SOPs make it easier to train new employees and maintain high standards.
- Quality Control: Implement robust quality control measures to maintain the integrity of your products or services. High quality leads to customer satisfaction and repeat business.
Customer Relationships
- Customer Loyalty: Foster strong relationships with your customers. Loyalty programmes, excellent customer service, and personalised experiences can turn one-time buyers into repeat customers.
- Feedback Mechanisms: Regularly seek customer feedback and use it to improve your offerings. Happy customers are likely to refer others and contribute to positive word-of-mouth.
Innovation and Adaptability
- Embrace Innovation: Stay ahead of the competition by continuously innovating. Whether it’s through new products, improved processes, or adopting new technologies, innovation keeps your business relevant.
- Adapt to Market Changes: Be prepared to adapt to changes in the market. Flexibility and agility can help your business navigate challenges and seize opportunities.
Financial Health
- Healthy Cash Flow: Maintain a strong cash flow by managing receivables and payables efficiently. A positive cash flow indicates financial stability and supports growth initiatives.
- Reduce Debt: Minimise debt to strengthen your balance sheet. A business with lower debt levels is often seen as less risky by investors and buyers.
- Monitor Performance: Ensure you have robust budgets and measures of performance that are tracked and reviewed on a regular basis.
Conclusion
Increasing the value of your SME involves a dual focus on boosting profits and strengthening the overall business. By optimising revenue streams, managing costs, and implementing smart pricing strategies, you can increase your profits.
Simultaneously, building a strong management team, enhancing operational processes, fostering customer loyalty, embracing innovation, and maintaining financial health will fortify your business ensuring you attract a higher multiple.
Together, these strategies will make your SME more attractive to potential buyers or investors and ensure long-term success.
By taking a holistic approach, you not only enhance the immediate financial metrics but also create a robust, resilient business that stands the test of time.