Five Characteristics That May Be Reducing the Value of Your Business

By Trip Holmes

For more than 35 years, I’ve advised business owners at virtually every stage of the business life cycle, with especially deep experience in guiding founders of family-owned, middle-market businesses through their exits. Business owners, to a large degree, control their destinies with regard to the end valuation, but it’s only with careful planning and astute management that they can maximize value over the long haul. 

Recently, I found myself thinking of some of the mistakes, often unwitting, that owners make to undermine their goals and reduce the value of their business.  Here are my top five for your consideration.

1. The business is too transactional in nature.

To get maximum value, you never want your business to be too transactional in nature. Buyers will simply pay more when a company’s revenues are less dependent upon hunting new customers year after year and more focused on long-term contracts. Contractually recurring revenue is much more valuable than what might be called historically recurring revenue, a term that depicts the dynamic of successfully replicating a level of transactions over time.

2. Too much of the business is concentrated within the owners.

Owners that build value are building something that’s bigger than themselves. You never want too many key account relationships, intellectual property, supplier relationships, and especially the brand or business identity overly tied to the founder or owner. When this happens, all of these areas change from favorable to risk factors when the owners cash out and walk out that door for the last time.

3. Too much of the business is concentrated in too few customers.
In many businesses, it’s easy to fall into the trap of doing too much business with too few customers, and it can be difficult to climb out of this situation, too. Customer concentration poses a high risk for a new owner, because the loss of one or two accounts could turn the buyer's investment sour in a big hurry. It’s important to understand that buyers already fear that all accounts are vulnerable with the change in ownership, so it’s important to be revenue-diversified at the client level.

4. Little competitive differentiation.
Buyers are just not attracted to businesses with no identifiable competitive advantage. It’s almost common sense: commoditized product or service without key differentiators is just too difficult to defend, and margins and profits will continually be challenged by competitors and customers alike. Thus, being innovative and creating space to differentiate are key to maximizing value.

5. The market segment is too narrow, has too little potential, or is shrinking.
Buyers are about growth, not maintaining the status quo. So, if your marketplace is so small that even if your company had 100 percent market penetration and your sales would still be capped at $20 million, a larger company wouldn’t get very excited about an acquisition. Your business just wouldn’t move their needle enough to justify the transaction.  

With our experience, we identify issues and help you take the necessary actions to correct your company's value detractors like the ones described above.  These exercises are always worthy of an owner’s investment in time and resources, as correcting these weaknesses in advance of offering your company for sale will result in a higher sales price and a greater percentage of the transaction value in cash at closing.

Contact us to start a conversation about your exit goals, and let’s get started on maximizing the value of your company!