Better positioning your business is always tough, entrepreneurs like yourself are constantly working on their business in the day to day sense. What lies ahead for you in the next year? In the next three years? Even if you’re not planning on selling your business soon, these two tips combined can increase the value of your business, streamline your process and increase revenue.
TIP 1: CLIENT/CUSTOMER CONCENTRATION – We all love our biggest clients, frankly they help pay the bills. However, as a business owner you should scrutinize these clients if they represent 15% or more of the business’ revenue. Why is that you may wonder? A business buyer will look at a large customer concentration of over 15% of gross sales as a risk to the business and a discount to the value. How long would it take your company to recover business lost if one or two of these larger clients should ever leave? In order to decrease the risk for you the current owner, we highly recommend reducing the percentage by two ways. Bring in more clients and start reducing the amount of work the larger clients/customers are receiving. This will not only make maintaining profitability easier, it increases the value of your company while also decreasing your risk. Bottom line: You don’t want to give up the large clients, you simply have to diversify.
TIP 2: JUNIOR MANAGEMENT PLACEMENT – Is everyone in your senior management team near retirement? It might be an awkward conversation to have or plan for but it is absolutely necessary to secure the future of your business. When it comes down to selling a business, a business buyer will look at your Senior Management and must consider the risk of replacing them if they’re near or at retirement age. Your staff has invaluable experience in the industry and that knowledge should have longevity past their time with your company. Hiring junior representatives who are ready to take over when the times comes ensures that the momentum of your business is uninterrupted. In today’s world where boomers are aging out of businesses and jobs one of the biggest issues ROI has encountered is the worry of who will carry the expertise once the current person is gone?
An example for further context and for privacy we won’t mention the industry. ROI’s consulted with a company that had a customer concentration of 35%. The owner had his hand in everything and there wasn’t a management team at all. Great for the owner and his business until it came to retirement. What does one do with their life’s work when you’re ready to move on? They turned to ROI and our President Gary Rayberg. ROI’s valuation of the business was $1.9 million and the owner (for various reasons) decided not to sell at the moment. They did however heed the advice ROI had given, the company made steps to reduce the customer concentration and hire one person to learn the management role. Two years later they returned to ROI having reduced the customer concentration to 18% and hired a management apprentice. The company valuation increased to $2.4 million with the changes. Reducing risk increases stability and affects value positively, don’t let the short term expense scare you away from long term thinking. Don’t know where to start? ROI can help.
ROI Corporation specializes in the steps before you even consider selling your business. Consultations and Valuations would be the first step into increasing the value of your business and also setting you up on the right track for the year. Call today to speak with someone about how to increase the value of your business, reduce your risk and create long lasting stability.
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