What is your business worth and why should you know?
Many business owners assume they will only need a valuation when they are selling their business, obtaining finance or for insurance purposes. But even if there’s nothing like that on your immediate horizon, every business owner should have a current valuation on hand to help them make informed decisions about the business’s direction.
Do you know the true market value of your business and the factors that contribute to it's value?
Why get a valuation?
A valuation will identify the elements that make a business valuable, and highlight the areas that need improvement.
If you are planning to grow your business, you need to know what your starting point is. A business valuation delivers a benchmark for comparing annual growth. A valuation will highlight areas for improvement and factors that are having a negative impact on your business. Strategies can then be developed to minimise these negative drivers and improve business value.
If you are planning to sell your business in the future, you need to start maximising the value of your business years in advance. A valuation will provide a strategic plan for the development and improvement of your business so you can obtain the required business value by the time you sell.
For business owners with plans for expansion, a valuation will provide an accurate industry benchmark, and can help you to obtain funding.
What is your business worth?
The simple answer is…it’s complicated! There are many factors that affect the value (and marketability) of your business. One of the most important determinants of value is your current and recent profit history, as this represents the reward to the owner or future business owner. However, profit is only a starting point. Less tangible factors such as customer relationships, intellectual property and stability are also major considerations. Understanding the components of value will help you adopt a value improvement mindset and result in a better exit outcome.
Is there a Value Gap?
If you are depending on your business to fund your retirement, or perhaps fund your next venture, you will need to have a good idea of how much money you’ll need for this next stage of your life. The difference between the present market value and the target value of your business is the Value Gap. Bridging this gap is only possible when you know what the gap is and when you understand what needs to be worked on. Knowing this well in advance will allow enough time for you to implement value creation strategies to build your business to the value you expect.
How can you increase the value of your business?
Whether your plan is to sell, grow, or prepare for succession; managing the factors that contribute to value should be the cornerstone of your business plan. What are the things you can work on that increase value?
1. Profit margins
Buyers want to see healthy margins and a predictable stream of income. Take a close look at your product/service offerings and ensure that you are aware of the profit margin of each sale. This means looking at purchasing or supplier costs, and then the mark-up you are passing onto the customer.
Reduce errors or wastage in your business. Track what you’re losing and work to improve the results in this area as this has a direct impact on your profit.
Unmonitored expenses can also be the cause of cash and profit bleed. Often when a business is experiencing surplus in sales they have some cash flow breathing space and expenses go unmonitored. It is not until the business may face shortage of work that the owner starts looking for ways to cut costs. Keeping a close eye on expenditure at all times, not just when cash flow is tight, is vital to the health of your business.
2. Strength of brand
Your business should have a clear value proposition and compelling offer. Positive brand equity allows you to charge more for your product or service, because people are willing to pay a premium for your name—just as they pay a premium for jewellery that comes in a little blue box or electronics with an apple logo on top. Is the quality of those products significantly superior to competitors’ offerings? Maybe, maybe not. However, the perception is that it is. And when customers are willing to pay extra for a name they trust or value, that boosts your profit margins. Customers are not only willing to pay more for a product with strong brand equity; they’re also willing to stay loyal to a company over many years. This kind of brand loyalty increases the value and marketability of your business.
3. Systems and processes
Work towards creating a workplace that is based on systems and which isn’t reliant on the owner to maintain performance. Sole traders or small businesses will find this harder to overcome, however as you grow ensure you place importance on incorporating systems and processes into your business. Ensure your systems are documented, implemented, followed and continuously improved.
4. Quality customers
Choose your clients wisely – good clients tend to attract more good clients, and vice versa. Be wary of chasing the money and exposing yourself to volatile customers or poor payers. Also, keep in mind the old adage “don’t put all your eggs in one basket.” Depending on a small customer base for most of your revenue makes you vulnerable. What if they change leadership and the new management goes in a different direction? What happens if they go bankrupt? Well-positioned businesses mitigate this risk by having a diversified and broad customer base thus making their business more stable and more valuable to a potential buyer.
5. IT systems
Quality IT systems are the backbones of most businesses. Investing early in reliable infrastructure will facilitate the smooth running of your business. If your IT is in disarray, expect to lose buyer confidence.
6. Experienced workforce
Dedicated and experienced staff can be a key asset in the eyes of a buyer. Key staff who have helped you create a valuable business are themselves an important part of that value. Strengthen your team through selective recruitment and training. Look for staff who will create value for your business, and managers with the skills to help you manage growth and achieve best practice. Clearly communicating your vision and strategy to staff will also help to motivate staff and gain their buy-in to value-adding goals.
7. Potential revenue
Buyers want to see potential and will be more interested if you can demonstrate that your business has capacity for growth, or that can be scaled up. For example, if you develop good business systems and operating manuals, you can show buyers that the business has the potential to become a franchise, expand into other geographical locations or acquire smaller competitors.
8. Financial Management
Know what the critical numbers are and how they affect your business. Having a clear understanding of your business’ financial performance, and meticulous record keeping to back it up, will not only help your bottom line in the short term but demonstrates to a potential buyer that the business is well managed and that finances are kept in check.
9. Less reliance on YOU
When considering the value of your business, you need to take yourself out of the equation. Your business should be an asset you own, not an extension of yourself. It should be able to operate without your daily involvement or leadership. If the business cannot function without you, it is going to be a major problem for a new owner.
The starting point of a value improvement mindset is to get an accurate picture of how well things are going right now. Not understanding and creating a plan to change or mitigate these risks can be devastating when it comes time to sell or exit the business. And lastly, make sure you have an accountant who is there to help you on a strategic level, has your best interests at heart and genuinely wants to see you succeed. Marsh & Partners work alongside you all year, not just at tax time. Our business improvement specialists can help you increase efficiencies and be as competitive as possible. Contact us to find out how we can assist you with valuations, exit planning strategies and value improvement plans.