Key Value Drivers of a Business
The business value drivers discussed here are not meant to be all encompassing. Focusing on those I talk about below will ensure that most buyers will perceive your client’s business in a positive light.
Business value drivers will:
- Create the perception that the future profitability of the business will be higher than it’s current profitability. They influence the buyer’s perception of future rewards.
- Increase value by reducing the amount of perceived risk.
- Improve the operations and profitability of the business, creating more value regardless of the buyer’s perception.
Other business value drivers can be uncovered by:
- Creating or updating your client’s business plan. This will help her understand the business’s strengths and weaknesses and see where she can drive value.
- Encouraging your client to talk to other business advisors. Each advisor on the team will have specialized knowledge in certain areas. They can suggest other value drivers that should be addressed and recommend other professionals to provide specialized services when required.
Working on value drivers takes time. It’s not possible to work on a large number of business value drivers, and realize their impact, in a short period of time. Ideally, there should be a couple of years to implement changes.
If your client is thinking of putting the business on the market in a year or less, she will have to focus on a few key value drivers that will lead to quick results.Below are a few of the key drivers you may want to talk to your client about:
Financial Results and Reliability
Buyers want to see a history of consistent, historical revenues and profitability / cash flow, so they will have some assurance of the predictability of future cash flow. Your client should also begin managing financial statements to maximize profits rather than minimize taxes.
The financial statements should be audited or reviewed to ease buyers’ concerns over the reliability of the financial information. In addition, the business should be able to demonstrate good financial controls.
Look at gross profit percentage too. Buyers will be motivated by high margins, especially if they are higher than your client’s industry average. This will provide compelling proof of a very effective business model.
The less dependent the business is on the owners, the more attractive it will appear to buyers. If the owners are involved in day-to-day decisions and relationships with their clients, buyers will question the impact when the owners leave and perceive a higher degree of risk.
Strong Management and Key Employees
Buyers like to see a strong management team that is capable of effectively running the business without owner involvement or with minimal involvement. If your client’s management team and key employees make most day-to-day decisions without owner input, this will increase the value in the buyer’s eyes.
Advise your client to get the management team in place as early as possible so that, by the time the business is on the market, the owner can go away for several months without worrying. Your client might also consider giving key employees a bonus for staying a certain period of time after the business is sold to give the buyer more security.
If your client has family members on the management team and they are planning to stay, advise him to make sure that they are paid market rates and are competent in their positions.
Loyal, Quality Workforce
High turnover is a red flag; it implies that the workforce has little respect for the business. While turnover is unavoidable, a core group of long-term employees tells buyers that the seller treats people well and pays them at or above industry levels. This implies that the business focuses on quality and service.
The most common reason that mergers and acquisitions fail after the deal is done is culture clash. When there are two different cultures, both buyer and seller often suffer. It is best if your client can clearly communicate the culture of the business to potential buyers so they can determine if there is a fit before going ahead with the deal.
There is another benefit to defining a company’s culture. All buying decisions are emotional, whether the buyer believes it or not. When it comes time to sell a business, the owner will get the best offers from those that connect emotionally with the culture of the company.
Advise your client to take the time to investigate whether the business’s formal vision, mission, philosophy, and values (if these exist) accurately reflect the culture of the company. If they don’t, or if they have never been defined, now is the time for the client to put some thought and work into this area.
During the sale process, the business’s website is one of the first things potential buyers look at. This makes it an ideal tool for both capturing buyer interest and impacting their perception of the value of the company. Improving the website and other marketing material one to three years before the sale also gives the owner time to attract more customers through those vehicles and grow revenue.
Your client will also need to ensure that the business’s physical premises reflect its desired image or brand. This includes making repairs to equipment and the facility, improving signage when necessary, and organizing inventory.
A good industry reputation and credibility also serve to enhance a business’s image with buyers. If your client’s industry presence is lacking, you might suggest some PR and marketing work.
Opportunities for Growth
Buyers view future prospects for the business more favourably if they see real and significant opportunities for future growth and a plan for capitalizing on those opportunities. Seeing where they can go with the business reduces their perception of future risk.
Advise your client to identify a number of opportunities, such as new or improved products and services, new clients, and new markets, that will allow a buyer to improve the growth and profitability of the business. Depending on your role, you might also help them do this.
Customer Diversity and Loyalty
A well-diversified client base reduces the perceived risk to the buyer. Buyers will carefully examine your client’s customer base to ensure the business is not dependent on one or a few major customers. If the business relies too heavily on too few customers, it is critical to start building the customer base. If that is not possible, your client can try to get large customers to sign long-term contracts.
Buyers will also examine the degree of client loyalty to a business. If the business’s client base is constantly changing and your client is simply replacing lost clients with new ones, it indicates some potential weaknesses in either quality or service that need to be addressed. Finally, your client should make sure that her customers or clients are loyal to the business, not the owner.
Market and Competition
Buyers look for a solid market presence and a strong competitive advantage. Is your client an industry leader or merely one of a number of similar businesses?
The number of competitors and the barriers to new competition entering the market also influence the value of a business. The higher the number of similar competitors, the less of an advantage your client’s business offers the buyer.
If your client doesn’t have a strong competitive advantage, there may be time to develop one. There are many ways to do this, such as by focusing on becoming the leader in a particular niche. You may want to advise your client to consider working with a branding company to ensure the business’s competitive advantages come across; this can be a competitive advantage itself.
Many companies do not get a very strong return on investment when it comes to their marketing budget. Business owners may not even know the impact their marketing efforts are having because the results are not measurable. A marketing agency can help improve the effectiveness of marketing—and often find creative, inexpensive ways to market—so that your client reaches new customers and boosts profits.
An effective marketing strategy will also help your client create industry awareness and credibility.