Unlock Your Business’s Potential
The value of a small business is primarily driven by its profitability. In most small businesses, there are numerous opportunities to enhance revenues, increase gross margins, and reduce costs. Improvements in each of these areas can result in significant increases in the value of your business. For many small businesses, every dollar in increased profitability will produce approximately three dollars in increased business valuation.
Many small business owners do not have the capability to re-evaluate their whole business on their own. However, a quick way to start, if an advisor is not in the budget is to look at a business’s waste. This can be in the form of raw materials or time. A reduction in waste almost always directly correlates to a reduction in costs and an increase in revenue. Looking at a business from this perspective often leads to other insights for process improvements resulting in higher revenue.
Although many changes can be made quickly, to maximize the benefits of the business sale process, the improved profitability has to be reflected in the financial statements for at least two (2) years before the sale. In other words, if you begin to implement changes only three (3) months before selling, the business valuation will not reflect the positive changes of your last three (3) months. It is never too early to implement profitability improvement efforts, but it is best to try to do so at least four (4) to five (5) years in advance of a business sale.
To gain a better understanding of how small businesses can improve their margins thus improving their business valuations, please consider reading this article: 5 Simple Ways to Improve Your Profit Margins