Have you ever wondered why some businesses have a line of prospective buyers out the door and others do not? In two words… it boils down to Value Drivers. Value Drivers are those elements of a business where profits reside. The definition of Value Driver goes something like this – a profit generating factor, service or unique business characteristic which increases the value of your business. Simple in its meaning, yet heavy in its significance. Sometimes it’s a combination of multiple factors that creates the value.
However, if it’s so simple, why do many business owners neglect to focus on it when contemplating a future exit. If you are serious about exiting your business in the future, then know it’s never too early to assess your value drivers. In fact, I recommend that you begin at least three to four years prior to an exit if you want to increase value and ultimately price.
What Are These Drivers Of Value?
There are certain standard Value Drivers that I have identified below that should increase the value of your business if executed properly.
Skilled Human Talent
In business today, leaders face serious challenges with attrition of their workforce. Employee loyalty is hard to earn but ultimately the key to business success. One huge problem that I’ve witnessed among businesses is the difficulty to attract and retain true talent; talent that adds value to the bottom line. I call it the TLC Value Driver;
Trust + Loyalty + Creativity = Value (more on this later)
This formula means that the quality of your employees influences the company’s ability to generate creative ideas and to produce products and services that your customers want to buy. This is clearly a critical value driver to the future growth of the company. An important question to consider; If you look at your key employees, does their talent, loyalty and creativity add to your bottom line?
Leveraging Technology
Another important Value Driver is your use of technology and how your company best leverages it to increase efficiencies and generate value.
Investments made into technology helps with:
Minimizing human error
Automating process and procedure
Saving time, which is money
Building Intellectual Property
From an exit strategy perspective, a company that develops and implements technology as a priority, will typically attract more buyers and better buyers than companies that have not.
Diverse Customer Base
Have you ever heard stories of a business that lost its biggest customer and went out of business soon thereafter? Maintaining a broad and well diversified customer base is a key driver that determines a business’s value in the market. In doing so, those companies will reduce their risk of declining cash flow should several customers decide, for whatever reason, to fly the coup.
Given its importance, companies should pay attention to the details of their customer make-up, required customer service levels and activity, product offerings by customer groups and more. This leads directly to customer service. Have you completed a customer satisfaction survey lately?
Financial Performance
As we know, a business’s financial performance will positively or negatively impact its value. Since all buyers of a business will look at the Key Performance Indicators (KPIs), if you are not familiar with your company’s KPIs…the time is now. Below I summarize the big ones that drive value;
Cash flow forecasts let businesses assess whether their sales and margins are appropriate and are consequently one of the most critical KPIs to track
Gross profit margin as a percentage of sales demonstrates total profits compared to revenue
Revenue growth is a financial KPI that refers to the rate at which a company’s income (sales growth) is increasing
Inventory turnover measures the number of units sold or used in a given period and is valuable because it reveals a business’s ability to move goods
Turnover Ratio tracks the turnover of accounts receivable. It is used to learn how often the business converts receivables into cash over a set period. It is critical to effective cash flow and liquidity.
Accounts payable turnover is a measure of the rate at which your business pays for goods and services in a given period
Having strong KPI’s relative to your competitors and industry averages are value drivers that prospective buyers will love about your company. As a business owner, you must recognize that it takes time to build-up your financial performance to a point that will excite prospective buyers.
Also, strong KPIs will help prevent a future buyer from knocking down the price due to holes in your financials that they discover during due diligence process. Holes that maybe you were unaware of.
Access to Capital
The size of a company influences its access to capital. For instance, small businesses have a comparatively limited access to debt and equity capital, over large companies. Having access to capital, at the right price and when you need it is critical to a company’s ability to increase its future value. It converts into the company’s ability to capitalize on opportunities when they surface, hopefully increasing the bottom line.
In Conclusion
If you focus on identifying and developing your Value Drivers early enough in the exit planning process, it is reasonable to assume that you will generate increased business value. It will take time and effort and probably a team of people, but in the end, it will put more money in your pocket.