Factors that drive business value

Over dependency

If you are looking to increase business value, then you need to ensure that your business is not over dependent on any key person, customer or supplier. The less dependant your business is, the more value it will have to a potential buyer.

There are four primary areas of dependency:

Products / Services

Does your business model rely on one
core product? Could you diversify and
spread risk?

Suppliers

Does your business have supply chain
risk from over dependency on a few
key suppliers?

People

Is the business dependent on you,
the business owner, or one or two
key shareholders or team members?

Customers

How much of your business is
dependent on a few major customers?

Financials

The main financials that will increase business value are:

Cash flow - Buyers will calculate the value of your business by estimating future cash flow and assessing the risk associated with generating that cash flow. If your business has a track record of sustainable or increasing cash, it reduces the risk a buyer attaches to your business.

Revenue – Buyers are likely to look at the previous three years’ financial data. Showing steady but consistent revenue growth is better for business value than sharp spikes in revenue. Inconsistent spikes in revenue make it harder to forecast future revenue and will therefore decrease value. A recurring revenue business model is the key to achieving a steady stream of revenue and increasing value.

Capital structure – Capital structure is the combination of debt and equity that you use to fund operations and growth. Reducing debt or refinancing to a cheaper source of debt will increase value. The balance of net debt (debt less cash and cash equivalents) at the time of sale will usually be subtracted from the purchase price.

Audited financials – Having clean financials and a number of years of audited accounts can also add value to your business. Audits ensure that the financial statements give a true and fair view. This can give potential buyers peace of mind. Often an audit can highlight value, adding areas of improvement in a business such as ways to improve management information, compliance, and minimise risk. All these areas, if acted upon, can add business value.

Having clean financials and a number of years of audited accounts can also
add value to your business.

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Capital expenditure (CapEx)

Potential buyers will look at how your company’s CapEx requirements for both maintenance and growth expenditure will impact cash flow. The effect of CapEx on your company’s value will depend on the category of CapEx being spent.

A mistake that is often made is to neglect CapEx investment and maintenance in the run up to a sale in order to build cash reserves and improve reported profits – but astute buyers will be wise to this. Ultimately this type of short-term thinking will be harmful to the business’ future prospects and this will flow through to the sale price achieved.

Quality profit vs quantity profits

Thinking about the quality of your profits and not just the quantity is important. Buyers will look at the potential for repetition of profits.

Having a strategy to increase the profit multiple of your business longer term may have a negative impact on short term profit. However, if you improve the quality of the profits in your business, it will undoubtedly increase the price that a buyer is willing to pay for your business in the future.

A mistake that is often made is to neglect CapEx investment and maintenance
in the run up to a sale in order to build cash reserves and improve reported
profits – but astute buyers will be wise to this.

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Strategic planning

Spending time to write a strategic plan for the business and ensuring that the whole business understands and is working towards the plan will certainly help to create value.

A strategic plan should map where the company is now, where it wants to be and how you intend to get there. With a well defined plan, the people in the business can ensure that the decisions they make today will help to grow the company and ultimately increase business value.

Business structure

When thinking of the future value of your business, it is essential to review all the elements of your corporate structure. An inefficient corporate structure, such as one containing redundant corporate entities, or a complex structure will reduce value as well as protracting any future sales process.

Consider the need to restructure to add value, perhaps to simplify and make it easier for a purchaser to buy precisely what they want, or to secure tax efficiencies, mitigate risk, streamline operations and make savings/synergies.

Spending time to write a strategic plan for the business and ensuring that the
whole business understands and is working towards the plan will certainly
help to create value.

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People

People are the heart of most businesses and creating a strong second-tier management team is important to increase business value. A strong management team will also reduce the dependency of the business on you as an owner. Relying on a single key employee as your second in command is often seen as risky to prospective buyers.

Building a management team, long before you aim to sell is imperative and showing that your business can survive and thrive without you is something potential buyers will want to see.

Employee engagement and employee satisfaction can also be a key driver in business value. Statistics show that a highly engaged workforce can increase efficiency, sales and customer satisfaction. Companies with great employee experience will often outperform competitors on innovation and profitability, so it can be a key differentiator if your potential buyers are looking to choose between the purchase of your company or a competitor company.

Operations

Buyers look for companies that have effective operations as this helps a business gain and maintain a competitive advantage. Providing a buyer with a proven operations strategy assures them the business is well positioned to sustain and increase profits and value.

Business owners need to demonstrate that the business has the right systems and processes in place to function effectively. Having documented procedures will show a buyer that the company can continue to operate smoothly post sale.

Strong controls will help to reduce the number of warranties and indemnities needed as part of the business sale, because the buyer will be more confident that risk has been minimised.

Marketing, brand and competitiveness

Companies spend thousands of pounds to create brand awareness of their products or services and to increase their brand value. Brand value can be calculated based on both current and future sales, as well as the potential for future growth. Creating a strong, well-recognised and highly regarded brand will increase your business value.

Corporate Social Responsibility (CSR) and social impact

Social impact is becoming more important to companies, employees and customers. ‘Social impact’ as a term can cover sustainability, environmental risk, philanthropic, volunteering and charity initiatives and overall social responsibility

Social impact can drive business value through improvements to operational efficiencies, brand differentiation, innovation, talent attraction, engagement and retention and risk mitigation.

Scalability

Scaling a business differs from merely growing a business, as scaling focuses on generating more revenue without increasing costs proportionally. Scaling is about planning how to increase the size and scope of operations and becoming more profitable as it grows. A business that has the capacity to scale will be worth more to a potential buyer

Contracts and legals

Having formal agreements and contracts with your customers, suppliers and employees is key to business value. Contractually securing relationships, whether it’s to minimise risk in the supply chain, or customer contracts to secure future revenue, adds stability and value.

Having documented procedures will show a buyer that the company can
continue to operate smoothly post sale.

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Innovation and creativity

Innovation doesn’t necessarily mean developing new products. It’s not just the realms of the R&D department, innovation can exist in all areas of the business. It could be areas such as communication, culture, empowerment, agility or new processes as well as product or service innovation. An innovative business will potentially have increased value. Investing in technology can also add value.

Technology frequently improves processes, controls and efficiencies to a business. Technology can often be attributed to significant cost savings, increased revenue, as well as improvement in areas such as employee and customer satisfaction. Investing in technology will also help to ‘future proof’ the business, which any buyer will be keen to confirm.

Intellectual property

Identifying intellectual property and protecting it will increase business value. Having things like patents, copyrights, brand names and trademarks will not only minimise risk but can deter competition and increase your market position. These areas will all add value for a potential buyer.

Innovation doesn’t necessarily mean developing
new products.

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