Business Value Driver
These ten value drivers will help you sell your business at a higher price than comparable businesses to yours. They are tried and true ways that increase a business’ cashflow and desirability in a buyer’s eyes.
What drives business value?
A business valuation does not aim to determine the value of a company in the hands of its current owner. It is more about the company’s potential transferable value. This article will help you assess your company from the perspective of a buyer. We will focus on ten value drivers from this perspective.
Each driver represents a property of a business that reduces risk or increases the likelihood that the business will grow in the future. These areas are key to increasing the value of your business. This will likely lead to you selling at a higher price than the industry average.
Business Value Driver #1: Predictable, Stable Cash Flow
Consider revenue and your bottom line cash flow as the first introduction to buyers. Cash flow and revenue are the most important attraction. When a business is sold, it will be valued higher if it has a proven growth pattern. Risk directly affects the value of acquiring cash flow. The risk of losing the cash flow during a transfer of ownership is lower, so the purchase price will be higher.
The recurring revenue stream that makes up a significant portion of a company’s total revenues can be valued higher than the non-recurring. Maintenance contracts, annual license agreements and monthly support agreements are all examples of recurring revenue. Buyers will pay more if they believe that the cash flow is predictable and will continue to grow in the future. Find out more about how to build a recurring income base.
Business Value Driver #2: Reliable Financial Information
Reliable financial records not only help in business management, but they also prove that a company is always profitable. The buyer must perform financial due diligence before purchasing a business. The buyer must be comfortable reviewing the company’s financial history. If they are not, the deal is unlikely to go through.
A seller selling a business that claims that it has made $1 million per annum for the last three years will not be accepted by a buyer. The seller must prove that claim. The seller will most likely have to produce past financial statements, which are incomplete, unsupportable or inaccurate. A lack of financial integrity is one the biggest hurdles that sellers face during the selling process.
Business Value Driver #3: Customer diversity
It is possible to protect a company against losing a single customer by having a broad customer base that does not include more than five to ten per cent of total sales. This reduces the chance of cash flow problems if one or more clients are not retained by new owners.
Business Value Driver #4: Human Capital/Quality of Workforce
Buyers are looking for employees who want to be there for the long-term. It is important to consider the quality of the workforce. This includes their experience and knowledge. A valuable asset is an in-place team that can offer continuity and help in the growth of the company under new ownership. A company’s success depends on its employees, not the owner. This ensures that the business won’t be adversely affected by new ownership. This will result in a lower risk and a higher purchase price.
Business Value Driver #5 – Growth Potential
A higher value can be achieved when an owner can clearly explain the reasons for cash flow and how the business will grow after acquisition. A documented growth plan can demonstrate the viability of the company’s long-term future and could identify new opportunities that the buyer may not have considered.
Here are some areas to consider when creating a growth plan. Are you in a growth sector?
Is there any other markets that a new owner should explore?
Which additional products are possible to deliver to existing customers?
What are the highest profit margins and how can they be increased?
What will increased marketing and sales efforts do for growth?
Do you have the potential to grow by acquiring?
Business Value Driver #6 – Systems and Procedures
Establishing and documenting standard business procedures and systems is a sign that a business can continue to be profitable after the sale. The business systems are the manual and computerized procedures that are used by the company to generate revenue and manage expenses. They also include methods to track who customers are and how they are served. These are just a few examples of business systems that increase business value.
Recruitment, training, and retention of personnel
Human resource management (an employee handbook)
New customer identification, solicitation and acquisition
Development and improvement of product or service
Inventory and fixed asset management
Quality control of product or service
Communication between customer, vendor, and employee
Selection and maintenance vendor relationships
Business Value Driver #7: Equipment & Facility Condition
To realize maximum value, the business facilities and equipment must be maintained. Buyers won’t pay a premium and may even discount an offer for a messy warehouse, office, or other building. A buyer may feel that the other parts of the business, such as financial records, employee records, and compliance records, are also disorganized. Before selling, owners should make sure that equipment and facilities are in top condition.
Buyers will appreciate the fact that they won’t have to make major repairs, and that all equipment and inventory can be easily located and identified. Are the facilities and machinery large enough to support modest sales growth? Buyers don’t want to be forced to search for more space or invest in new equipment immediately after closing.
Business Value Driver #8 – Goodwill
This value driver is about stability and consistency. Business goodwill and influence are all about name recognition, customer awareness and history. Relationships are important, even if there aren’t many assets. It matters that customers have been with the company over a certain period of time. High customer satisfaction, brand recognition and product reliability are all important factors that add value. It is important to consider this driver of goodwill when valuing a company.
Business Value Driver #9 – Barriers to Competitive Entry
The features that give a company an advantage over its competitors or strengthen its strategic position. They can also be used to increase value and reduce perceived risk. A niche with barriers to entry will attract buyers who are willing to pay more.
Here are some examples of barriers that can be used to increase the moat and prevent competitors from entering the castle.
Copyrights, Trademarks, Patents and/or Trade secrets
Trade names or brands
Step-by-Step Training System
Hard-to-get licenses or zoning permits, regulatory approvals, or permits
Business Value Driver #10 – Product & Supplier Diversity
A limited product range increases risk and lowers value. Diverse revenue streams lowers inherent risk for the business. Businesses with a diverse product portfolio, high gross profit diversification or products or services that are sold in multiple industries have a higher perceived value to potential buyers.