Monday, August 21, 2017
Doing business in fast-rising and highly-populated Ontario means it’s a priority to ensure that your company stands out starting from its early stages of growth, to maturity, and all the way to when you will assess its viability to survive in the near future, which may result in you exiting the business. In these cases, a company valuation is useful in arriving at a benchmark for measuring growth as value enhancement initiatives are introduced to continuously increase the value of the company.
There are a number of value enhancement initiatives you can undertake to increase your company’s valuation in Ontario. Apart from financial performance and growth, improving the Switzerland Structure can greatly benefit your company’s performance, growth, and valuation in the near future.
What is the Switzerland Structure?
The Switzerland structure refers to how dependent your company is on any one customer, supplier, or employee to operate successfully and continuously generate profit. The greater the dependence, the greater the risk and lower the company valuation.
Many businesses in Ontario cement their profit and reputation by maintaining productive relationships with loyal customers, but it will do your company no good if your customer base does not expand, and remains largely dependent on just one or a few customers. Imagine what would happen to your company if you lost a customer who accounted for over 50% of your total revenues?
Potential purchasers will be dissuaded from acquiring your business if it is overly dependent on any one customer, as it is perceived to be high risk. As a result, they may only offer to acquire your business in Ontario for a deeply discounted valuation multiple – which means less in your pockets if and when you sell.
To counter this dependence and arrive at an improved business valuation, it helps to strive to have your top five customers account for less than 20% of total revenues.
Delivering your products and services requires working with suppliers for necessary inputs. While it’s common to establish partnerships with a supplier or suppliers in Ontario you have consistently worked with in the past, it may be worthwhile to branch out to avoid having production and delivery of services affected by potential increases in costs or volume restrictions from an existing supplier.
When your company is dependent on a sole supplier, they can easily raise costs or restrict supply volumes, leaving you no choice but to pay the price, or risk passing off the cost to customers who may not respond well to the sudden price hike or limited availability you can supply. Add to that, potential purchasers will perceive your company in Ontario to be high-risk, and as a result, shy away from acquiring it, or offer to do so based on a much lower company valuation multiple.
To maximize your company’s valuation in Ontario, aim to acquire inputs from at least three or more different suppliers.
Human resources are invaluable in any company, but your business should not be dependent on just one or two employees to generate revenue or facilitate smooth operations. It’s natural to trust talent you know, but imagine what would happen to your company if you only had one sales representative who is solely responsible for bringing in over 50% of your company’s revenues, and they resigned? How are your company’s operations expected to continue smoothly?
When your company is dependent on a key employee, it is viewed as a higher risk acquisition, and if acquired in Ontario, will likely sell at a reduced company valuation multiple. To avoid this scenario, make sure to build a sales team from the onset, instead of having just a single salesperson. With a team, you can easily smooth out the customer journey and distribute key tasks.
To build a successful sales team, you can start by hiring at least two salespeople instead of one to foster a healthy spirit of competition; carve sales territories into smaller and more achievable chunks; and practice charging customers upfront to have more cash for building your sales team, and more time for training them.
When your business in Ontario is able to demonstrate that it is not dependent on any one resource, you are more likely able to secure a premium offer, as the company valuation will show that your business is not high risk, and will be much more likely to generate revenues and profits for a potential purchaser.
Discover how you can improve the way you do business today to derive a favorable company valuation and arrive at a profitable future. Call us at 905-305-VSPL (8775) to assess your company’s Switzerland Structure and learn how you can better leverage value enhancement initiatives.
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