As a business owner, you’re always looking for ways to increase your company’s value. After all, a higher business valuation means you can sell the company for more money down the line or attract more investment.
But are there certain things you’re doing that may actually lower business value? Read on to learn some of the most common mistakes many organizations make that lower company value—and how to avoid them.
1. Not reinvesting in the business
One of the biggest mistakes business owners can make is not reinvesting enough in their business. Yes, taking some money out of the business is necessary for funding your lifestyle. But if you’re not reinvesting a portion of your earnings back into the business, you’re not giving yourself a chance to grow.
Look for ways to reinvest in your company. For example, you might hire employees, develop new products or services, upgrade information technology, streamline processes, or invest in marketing and advertising. Doing so will help increase business value.
2. Paying attention to revenue instead of cash flow and margins
Many business owners put too much emphasis on sales revenue and neglect to pay attention to cash flow and margins, which can lower the business value.
When you focus on revenue, you’re looking at the total amount of money the organization brings in. Revenue is important, but there are other factors contributing to business value. Cash flow, or the net amount of cash being transferred in and out of the company, is also important because a negative cash flow hinders the business’s ability to pay expenses, expand and grow.
Margins, or the percentage of each sale that goes to profits, are also important because a higher margin means that you’re making more money on each sale, which can contribute to a higher business value.
If you focus too much on revenue and ignore cash flows and increasing profits, you may be sacrificing profitability for short-term gains.
This can lower the value of your business in the long run. If you’re interested in increasing business value, make sure you’re taking steps to improve all three key factors.
3. Focusing too much on short-term gains
It’s important to be mindful of both short-term and long-term business goals when running a small business. But if you focus solely on short-term gains, you could be sacrificing long-term growth—and, ultimately, lowering business value. Yes, it’s crucial to hit quarterly targets and keep shareholders happy. But don’t do so at the expense of long-term planning and investments. Balance is key here.
4. Letting personal issues impact the business.
As a business owner, it’s essential to keep your personal life separate from your professional life—as much as possible, anyway. If personal problems impact your ability to run the day-to-day operations of your business, it will show—and investors will take notice. Do what you can to keep personal issues from seeping into work; otherwise, it could negatively impact business value.
5. Placing too much importance on tax avoidance
When business owners focus too much on minimizing their taxes, it can hurt business value. This is because overly aggressive tax avoidance can make it look like the company is not being run responsibly and sustainably.
It’s important to strike a balance when it comes to taxes: you don’t want to give the Internal Revenue Service more than necessary, but you also don’t want to do anything that could hurt the value of your business. Be mindful of how you manage your tax affairs, and ensure you’re always acting legally and responsibly. This will help ensure that your business is seen as a credible and valuable investment.
6. Depending too much on the current owner
Companies that are too dependent on the current owner are less attractive to potential buyers or investors. This is because they are seen as less stable—if the current owner leaves, the institutional knowledge, customer relationships, and profits go with them.
To make your small business more attractive to potential buyers or investors, create a plan for how the company will operate without you.
This plan should include a strategy for recruiting new talent and maintaining momentum even if you’re no longer there. By showing that you have a solid plan in place for the future of your business, you’ll make it look more stable and valuable.
There are several mistakes that business owners can make that will lower business value. By avoiding these pitfalls and instead focusing on building a solid foundation for long-term growth, you can help ensure that your company is valued as highly as possible—both now and in the future.
This is where the team at Prithi Daswani CPA can help. Our approach involves understanding your business and providing sound advice that can help you minimize taxes while maximizing growth opportunities. Reach out to a team member today to set up a consultation.