9 Primary Value Drivers for Increasing the Value of your Business Before the Exit
Business value is important to all businesses, but it is transferable value – what a business is worth to a buyer without the owner’s presence and involvement in the business – that drives a successful exit. Transferable Value can be increased by having strong Value Drivers. Strong Value Drivers are what make a company a desirable acquisition to buyers. Buyers will pay top dollar for a company with well-functioning Value Drivers because Value Drivers inherently contribute to increased cash flow.
To help guide you toward the kinds of Value Drivers business owners should aim to install in their companies, we’ve compiled a list of the nine most important Value Drivers. As you read through this list, remember that it is not exhaustive. Depending on what your business is and which types of how it is ran, there may be other Value Drivers that create and increase transferable business value. However, these Value Drivers are nearly universal.
Next-Level Management - Next-level management is the mother of all Value Drivers. It is the most critical Value Driver because in the end, management oversees the installation and growth of all other Value Drivers.
As the name implies, next-level managers usually work in companies that are typically larger than your company. Next-level managers will know how to grow the company at least to the level of the larger companies they’ve worked for. These managers have worked with customers, vendors, advisors, consultants, and others in the market at levels to which your business aspires to grow.
This isn’t to say that your existing managers can’t grow the company to the level needed to bridge any Asset Gaps you might have. Whether current managers can do that is a determination you must make, using either your own expertise or the expertise provided by your Advisor Team. Existing managers certainly can drive growth at the pace necessary if your company is currently growing at a pace that will bridge any existing Asset Gaps.
Operating Systems that Improve Sustainability of Cash Flows - Establishing and documenting standard business procedures and systems demonstrate to buyers that your business can maintain profitability both after the sale and after you have exited. Properly established and practiced systems create cash flow and increase its sustainability.
In short, savvy buyers—without exception—look to this Value Driver. If it is absent or weak, buyers move on. We cannot understate the importance of this Value Driver: Creating and documenting systems and processes is crucial to building your business value to the point at which you can leave your business on your terms without fear that they will fall apart without you.
Diversified Customer Base - Buyers typically look for a customer base in which no single client accounts for more than 10% of total sales. A diversified customer base insulates companies from the loss of a major customer. For example, if you have a company whose three top customers generate 40% of all sales, a buyer would be concerned if one or more of them left upon learning that you sold the company. To a lesser extent, this may also be a concern to key employee, co-owner, or family buyers if the biggest customers are loyal to you as the business owner rather than to the business itself or other employees. Thus, customer concentration is a risk factor to avoid, regardless of the Exit Path you might choose.
Proven Growth Strategy - Even if your clients expect to retire tomorrow, it makes sense for them to have a written plan describing future growth, and how you will achieve that growth in the context of industry dynamics and demand for your company’s products. This growth plan may include developing new product lines or augmenting existing ones, market plans, growth through the acquisition of other companies, expansion into new territories, or increasing manufacturing capacity. A detailed and properly communicated growth plan helps attract buyers, especially if your previous plans have allowed you to successfully attain your goals. Combining next-level management with a written growth plan that details business value is a powerful one-two punch.
Recurring Revenue that is Sustainable and Resistant to Commoditization - you may want to view this as two Value Drivers:
Recurring, sustainable revenue
Having products or services resistant to commoditization
The reason that revenue is a Value Driver is evident: If you were a buyer, you’d much prefer to buy a business that makes money hand over fist than one that struggles to eke out a profit. The question you should ask is, is there a way for your company to create one or more recurring revenue streams?
The first step in installing this Value Driver is to find out whether your company has recurring revenue streams to begin with. Another question to ask is whether your products and services are viewed as commodities by customers.
It’s difficult to create any useful product or service that can’t be quickly imitated and commoditized by competitors, so continuous innovation in addition to the other strategies mentioned above is crucial when it comes to building transferable value.
Good and Improving Cash Flow - Ultimately, all Value Drivers contribute to stable and predictable cash flow. You can increase their company’s cash flow today by focusing on ways for your management teams to operate your businesses more efficiently: increasing productivity and decreasing costs. However, this alone may not create sufficient growth to allow you to achieve your objectives on time. Additionally, this Value Driver depends on the effective operation of other Value Drivers.
Growth throughout the entire infrastructure of your company is pivotal to growing cash flow. For example, growth in the number of customers you serve requires growth in customer service. When the quality of your customers increases, or when you add or change product and service offerings, the entire organization must grow in lockstep. This means more—or better—management, more training, and more accountability.
Demonstrated Scalability - Under the right circumstances, increased revenue can lead to increased profit margins for your business. Consider a gaming app on a phone. There’s a fixed cost to design and test the app, but additional sales don’t necessarily increase those costs. While scalability may be a bit more difficult if you’re the owner of a hardware store, it’s not impossible: If your hardware store enjoys high profitability and strong revenue growth, it’s likely that the company has many of these Value Drivers in place, including a competitive advantage. If these Value Drivers can be replicated, you can scale the business by establishing new stores in different locations using the same Value Driver model, similar to the model Apple uses with its Apple Stores.
Scalability should be a major focus for your business. It is perhaps the quickest way to grow cash flow and increase business value because scalability is based on something the company is already doing.
Competitive Advantage - The competitive advantage your business provides is the reason your customers buy from you instead of from your competitors. So how do you identify any competitive advantages your company might have? It isn’t easy, especially since you may have a competitive advantage that you don’t even know you have. A good way to determine whether there is a competitive advantage at all is to compare your profit margins and growth rate to your competitors’. If they are considerably higher in your business, it’s a good bet that you have a competitive advantage.
It’s possible that you have a competitive advantage and know what it is. However, if you don’t, you’re likely competing on price alone, which means that you are susceptible to commoditization. In either case, it’s worth spending time on this Value Driver.
Financial Foresight and Controls - Like recurring revenue, this Value Driver also has two aspects. The first relates to financial controls or reporting. Many companies lack reliable financial reporting to such an extent that buyers can’t determine what the company has or track the source of its revenues. Usually, this problem is correctable, but it takes time to do so. More importantly, sloppy financial reporting can indicate to buyers that there’s an underlying problem, the most benign of which is that owners and management lack a clear understanding of their own company’s financial performance. The second aspect is less apparent but more important. If you want your company to grow substantially and quickly, your business “must be fed.” As you create a growth plan for your business, you must also project the cash flow cost of implementing the plan.
You must assure that you have a a firm grip on your company’s financial condition. This is a critical responsibility because you are the one signing off on all the loans and other obligations of the company. Thus, being able forecast the financial demands that your growth plans will create, with the help of a CFO or CPA if necessary, is important. If growth needs to accelerate substantially and quickly to meet your goals, it may take more than the cash flow in your company to produce to support it. Bank or other financing should be secured before you find yourself in the middle of expansion and short on cash.
For more detailed information, review of your current agreement, or to simply see which of these might apply to your situation simply schedule a 45-minute complimentary discovery call.
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