We at B2B CFO® talk often about how to increase your business valuation. Maybe it’s time we talk about common ways that small and medium sized business (“SMB”) owners unwittingly sabotage their company’s value.
- Focus on Tax Avoidance. Sure, we all love to minimize tax. Some methods are perfectly legitimate and will not affect your business valuation since they are added back in the determination of EBITDA, which is usually the key factor in valuation. Examples are accelerated depreciation, owner bonuses, discretionary pension/profit sharing contributions, etc. But other methods of tax avoidance (or perhaps tax evasion) such as under reporting income or running personal expenses through the company may not be accepted as add-backs by a prospective buyer. This is truly a “penny-wise, pound-foolish” strategy. Tax avoidance/evasion saves no more than $.40 for every dollar of taxable income under-reported, but can cost 4x or 5x that amount in valuation. Don’t let the tax tail wag the dog.
- Allow Revenue Concentration. In an effort to bring about top line growth, business owners sometimes allow a single customer to constitute too large a portion of total sales. Anything above 20% is too much. Customer concentration increases the prospective buyer’s perception of risk and tends to drag down valuation. Grow the company sensibly without concentrations that increase risk and drag down valuation.
- Fail to Foster Middle Management. Many small and medium sized business owners fail to develop a core group of competent managers who can efficiently run the business when the business owner is away. Many such companies have little or no value to a prospective buyer since the intellectual property resides solely in the business owner’s head and cannot be easily transitioned to a new ownership group.
These are very common maladies affecting SMB’s. The good news is that we can help fix these conditions and help raise your business valuation accordingly. Call me at (707) 753-1588 or email email@example.com for a free Discovery Analysis if you want to address valuation issues or other business challenges. The Discovery Analysis is free, and could be the most important decision you will ever make as a small business owner.