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How can you maximize the value of a business?

Many individuals find the best investment they have ever made has been a business they started and owned, probably because of the amount of influence they’ve have over its management. Unlike investing in public company stocks or real estate, an owner of a privately held company can control many of the factors that enhance value, including how hard and much he or she is willing to work at building the business. Other factors include the volume and growth of sales and management depth and diversity.

But perhaps the most important factor in establishing the value of a business is profitability. Many business owners are tax motivated, however, and focus on reducing profits, which reduces the value of their business. If the business owner never expects to sell or transfer the business, this may be an acceptable strategy. But if a sale is a possibility, the privately held company owner should focus on profitability. And not just in the year before a contemplated sale: investors/buyers want to see a history of profits.

Here are some techniques for increasing profits and company value:

Paying for company perks to owners by increasing dividends, which do not come out of profits

Set compensation levels for the owner(s), officers, and employees in line with industry averages, with additional compensation paid through stock incentives, dividends, and/or a profit sharing plan

If feasible, consider long-term relationships to help contain costs, protect distribution rights, and minimize inventory levels

Another way to help maximize value is to create an organizational structure that reduces dependence on one or a few individuals, because a company with many individuals responsible for its growth will generally have more value. This, of course, requires training, patience, persistence, and creating incentives that keep key people around.

You can also increase company value by having annually audited or reviewed financial statements, because these give added assurance to prospective buyers that the financial records have been prepared each year and in conformity with Generally Accepted Accounting Principles (GAAP). And financial records that show a trend of strengthening each year will bolster company value.

Finally, the business owner should compare company financial ratios to industry averages each year to identify where the company may be weak. Identifying and correcting potential problems will usually translate into more profits, a stronger financial statement, and greater company value.