What determines the value of a company?
Two businesses with the same revenue flows and yearly incomes can have very different valuations. Why?
A company’s valuation is determined by the “value of all the future revenue flows it will generate along with the estimated value the business will get when it sells and the discount rate.” Businesses whose future revenue flows are less predictable and have a higher discount rate is expected to have a lower valuation compared to companies whose future revenue streams are highly predictable and have a lower discount rate.
This means that companies can increase their valuation by lowering the discount rate and increasing the expected future cash flows, which can be obtained through a robust growth plan.
What are the Crucial Factors that Increase a Company’s Valuation?
There are hundreds of strategies that work together to improve the valuation of a company, but here are the most crucial ones you need to follow:
Tip #1 - Develop a Robust, Effective Growth Plan
A robust, effective growth plan considers all the driving forces, expenditures, and capital investments over the forecast period. In addition, it will have support for each of the predictability made in the growth plan. For instance, the plan will drive sales to verify if the assumptions are in line with what the company has faced in the past. This factor holds true for every segment of your income statement.
Tip #2 - Build a Strong and Skillful Management Team
The majority of tier 2 companies are very much responsible to the CEO for their success. In these companies, the CEO is responsible for maintaining customer relationships, holding a consistent sales cycle, or is the mastermind behind the company’s product development. With the majority of these operations being reliable on the CEO, the future cash flows are very uncertain. This implies that the overall business could experience setbacks if something happens to the CEO.
Developing a strong and skillful management team saves time for the executives to focus on more important things and increases the company’s valuation.
Tip #3 - Drive More Predictabilities in Your Revenue Flows
Businesses that fail to predict their future revenue flows are much more at risk than a company with their revenues locked in for the next month, next quarter, or next few years.
One of the major reasons cloud-based companies retain so much value is because they have their revenue locked in for each month. Moreover, these SaaS companies highly predict their income flows going several months or years.
If you are able to retain customers and build recurring income streams that are highly predictable going several months into the future, your business will automatically increase its valuation.
Tip #4 - Expand Your Revenue Sources and Generate More Leads
In most cases, over 20% of a company’s overall revenue comes from one dedicated client, and more than 50% of the overall revenue comes from the top 5 clients. This leads to uncertainty in the businesses’ future cash flows.
In case the customer decides to terminate its contract with the company, its future cash flows will be severely affected. This also holds for the company’s lead sources. This means that if your business generates the majority of the leads from a single source, any disruption on that lead course will significantly affect the company’s future cash flows.
To conclude, create a business plan that generates no more than 5-10% of your overall revenues from a single customer or lead source. This will lower the risks from your company’s future cash flows and make your business more valuable.
Tip #5 - Maintain Customer Relationships and Improve Overall Satisfaction
Will you be able to say that you maintain strong relationships with your existing customers and have high customer satisfaction levels? If so, you must already have a track record to analyze customer satisfaction levels. You’d be using this data to predict future product trends and derive insights on where the satisfaction levels plummeted.
Moreover, you can also use the Net Promotor Score or conduct regular surveys to gauge customer satisfaction levels. For example, if you have a lot of customers, you’ll receive client feedback at regular intervals. Or, you can also include feedback forms from third-party sites like TrustPilot or TripAdvisor.
If you maintain high customer satisfaction levels, your future customers will be ready to pay a high value for your product. Moreover, you’ll also be able to demand a higher price for your company when you want to sell it.
Tip #6 - Build a Prominent Social Footprint
It’s acceptable not to have an active presence on all social media channels, but the ones you choose to remain on should be up to date. For example, your company must have an active page on LinkedIn, Twitter, Facebook, and Instagram. You should regularly post stories on these channels and avoid getting muddled with politics and controversies. If you plan to conduct webinars, Hackathons, or get involved with community projects, ensure that your followers and customers know about them through social media.
Put simply, the more exclusive your audience is, the more valuable your business is. However, it doesn’t always work that way. A comprehensive social media reach with little to no positive content can be more damaging.
That being said, don’t forget to handle the customer complaints on social media channels politely, honestly, and with prompt responses. Last but not least, don’t forget to thank the customer for their feedback.
It may seem not easy to address all these factors at once, but if you deal with one element at a time, you’ll definitely start to see improvements in your company’s valuation.
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