TORONTO—The second installment of Canadianmanufacturing.com’s series on value for your business explores how to create value.
To understand value creation, business owners must understand what drives value in their business. While these drivers vary according to the nature of your business, there are a number of common categories.
Uncovering new ways to increase revenue and profitability improves value. Prospective buyers will place more value on cash flow expected to increase in the future, thus businesses demonstrating strong cash flow with good expectations for future growth tend to have higher values than those that don’t.
Business owners must recognize value of a business depends on the interrelationship of the quantum of the cash flows and the quality of those cash flows. Management may initiate activities to increase revenues and cash flow, but those activities may inadvertently increase the risk profile end up decreasing value.
Effectively managing internal risk factors and responding to external risk factors will impact a company’s quality of cash flow or risk profile, and increase the value of the business.
Examples of qualitative factors that reduce the risk profile of a business (and increase the value) include:
Other strategies focused on the “ownership” of the business and improving after-tax proceeds available to the owners when they sell include:
Identifying value creation strategies early offers a roadmap to better manage the future growth in the value of your business. Implementing these strategies will take time, but identifying and implementing them in advance of a sale means the business will be ready to sell when you are.
Suzanne Loomer is Managing Director at Campbell Valuation Partners Ltd. in Toronto. She can be reached at email@example.com.