In the previous KT Addition, I explored some of the driving forces increasing business value. These included competitive advantage, reputation, non-compete agreements or employee ownership. I left that article with a teaser noting that reducing risks is a sure-fire way to increase overall business value. In this article, we will explore some of those ways.
Generating sufficient CASH FLOWS is the number one priority in reducing risks. With strong cash flows you can stop worrying about how to make payroll and start thinking about stability and expansion. Yes, I do realize this is pretty obvious but it is relevant. There are a number of ways to increase revenues, control costs and minimize expenses to see the bottom line soar and consequently business value.
Retiring all debt may feel good but it isn’t always the right answer. A healthy CAPITAL STRUCTURE may be comprised of both equity and debt. The “right” percentage of equity and debt will depend on what type of business you operate. Simply put, debt is cheaper than equity, and as such, the leverage can greatly enhance return on capital. But debt also compounds risk. If your business is capital intensive such as construction or retail, you may likely have debt that approaches no more than 30-40% of total capital. Alternatively, if you own a service business, you should probably have far less debt as it is too risky. A business that has some debt has the ability to use cash flows to grow or expand or try new product lines, purchase new equipment when needed.
Being careful not to put all your eggs in one basket also reduces risk. Use caution if more than 20% of your revenues stem from work with one customer. Do your homework to learn the opportunities and threats that face that customer. If it fails, so could you. Likewise with suppliers… relying on one supplier for the bulk of product increases company risk. DIVERSIFICATION is essential! Alternatively, if you have too many eggs in one basket, make sure to watch that basket very closely!!!
People crave routine. If a customer frequents your business regularly and then you relocate or they may switch to your competitor which is in close proximity to their normal route. My suggestion is to find a place you like and either buy it or sign a LONG-TERM LEASE on the space. Customers will appreciate the stability they feel with you. As a business owner, moving is expensive and time consuming. Find a spot, make your nest and get to work doing what you do best.
Do you or your clients have Business Valuation questions or needs? Call the KTLLP Business Valuation Team today for answers.
This is the third in series of Business Valuation Strategic Planning articles. Watch for the rest of the series in upcoming KT Addition newsletters. Previous articles can be found at ktllp.com.