Thursday, December 26, 2013

How to Double the Value of Your Business in Two Years

As we approach the beginning of a new year I reflect upon our firm’s achievements and challenges over the past year.  Celebrating accomplishments and monitoring progress towards goals are vital to your continued focus, commitment and motivation.
 
How did your business do this year compared to your original goals?  Are you on track to exit your business at a time of your choosing?  Has your business increased in value over the past year?  Would you like to double the value of your business within a two year period?  It may be challenging, but it can be done. 
 
Smaller start-up companies can increase in value quite quickly, particularly if they are able to create their own market or are successful at penetrating and finding a niche in an existing but growing industry.  Increasing the enterprise value [1] of a larger and more mature company, however, is generally much more difficult. 
 
Two of our clients at VSP this past year actually doubled their enterprise value within a two year period - and these clients were not small, start-up companies.  Having conducted a business valuation two years earlier, we were asked to update our valuation this past year.  One was required for tax purposes and the other was required for planning purposes in connection with a potential shareholder buyout.  One business has been a service provider for 15 years and had over $30 million in annual sales.  The other company has operated as a manufacturer for over 40 years and had over $50 million in sales. 
 
You may be wondering how two mature businesses in separate industries were able to double their enterprise value in two years.  A quick review of our valuation analyses reveals the following top 5 common factors contributing to this achievement:
 
  1. A Business Plan - both companies had business plans in place two years earlier which included financial projections showing modest growth rates in sales and EBITDA going forward;

  2. Recent Growth - both companies experienced recent growth and actually exceeded the sales and EBITDA targets set out in the financial forecasts from two years earlier;

  3. Future Growth - both companies had updated their business plans from two years earlier and increased their financial forecasts going forward.  The fact that earlier projections were documented and the company actually exceeded targets enhanced management’s credibility with respect to the growth projections going forward;

  4. Tangible Asset Backing - in order to support the recent and future growth, both companies had reinvested in the business thereby increasing the net tangible operating assets over the past two years; and

  5. Reduced Risk Profile – as a result of both controllable (i.e. internal company specific) and uncontrollable (e.g. external market conditions) factors, both companies decreased their risk profile (i.e. lower discount rate or capitalization rate) thereby increasing the valuation multiple.
  6.  
Any increases in redundant assets owned by your business (e.g. non-operating assets such as excess cash or marketable securities) or decreases in interest bearing debt outstanding will increase the value of your equity interest over and above the increases to enterprise value noted above.
 
It may not be easy but concentrating on these 5 factors will go a long way towards helping you double your business’ enterprise value in a two year period.  If you are planning to exit your business in the coming five years now is the time to get focused.
 
An independent business valuation can help measure your value increases over time.  This becomes critical if you are planning to exit your business in the coming decade and want to maximize your net sale proceeds.  Contact us at jason@vspltd.ca or www.vspltd.ca to see if you qualify for our VSP Exit Starter Program or want to document your value increases over time with an independent business valuation.
 
 
1.  Enterprise value represents the value of business operations attributable to both equity and debt-holders.

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