One big question to establishing the value of your business going forward is can your business operations scale up? In other words, can you be expected to earn higher returns off your existing operations as you grow? Normally, there are some upfront expenses that you have to setup, computer systems, accounting, corporate structure, manufacturing processes, service processes and so forth. In theory, as you expand to more customers or expand geographically, you should not have to incur some of that same level of cost and there should be higher profits.

So, what things can you look at to see if your business can really scale up and really maximize the long-term value of the company?

1. Management. Is the company heavily dependent upon one or a couple key people? If so, that could severely limit how far a company could be able to grow.

2. Established processes. Have you put established processes in place that have been tested over time and are well documented? Can these easily be transferred to new people, whether in your current location or as you open up new locations? The classic example of this could be McDonalds where you certainly see they have a process that translates over to each new McDonalds that is opened up and their processes are replicated amongst all the location whenever changes are put in place.

3. Market growth. Is there room to expand within the market that you’re dealing with, so that you can attract more customers at the same or even higher margins than what you currently are experiencing? In other words, you’re not going to be subject to the law of diminishing returns whereby you’re going to have to offer significant price concession or otherwise to get incremental business. In this latter case, margins on the incremental basis would actually fall rather than be able to rise.

4. Operating efficiencies. Is there the ability to pickup operating efficiencies over time with your growth? Ideally, you might have, for example, unused capacity that could be put to greater use with further growth. Or, you might be able to keep moving to more efficient equipment or other techniques.

If you have a business that can be scaled and earn even more profits on larger volumes, then you can be much more attractive to potential future buyers. They can see a value to coming in, buying out your business, putting more capital into it and get the kind of returns they would need on that incremental capital.

So, take a hard look at your business and see what could be done to make it more scalable. It might be a change in strategy and get into more attractive segments of the market. Or, perhaps, it could be getting more efficient in changing the ways how you operate, so you have processes that can be translated over to new people and new locations and you become less dependent upon a couple keep people in the company.

Develop a business that can be scalable and you can see the value firm scale up quite dramatically.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value