How to Drive Business Value
Written by: Michele Leppard
Not all businesses end successfully. In fact, 90% of all companies fail within ten years. A few key value drivers could make a significant impact on your business and may be all you need to turn your business around and ensure sustainability.
Value drivers can positively impact your business, especially when you are willing to objectively look at your business through the eyes of a potential buyer. Value drivers either aim towards reducing the company’s risk or enhancing its growth; either way, these drivers are actionable and effect your business valuation.
Value drivers are broken down into operational, financial, and sustainability drivers. This article will focus on a few dominant drivers that will impact your business value and the various ways that you can implement them.
Stable Cash Flow - As with all businesses, cash flow is a significant factor when valuing the company. When the cash flow is steady and consistent, the risk minimizes. Here a few ways to build a stable cash flow:
Collect receivables promptly and enforce a payment policy.
Pay your invoices on time but avoid paying too early but also be careful not to be late.
Perform a twelve-month forecast and map it out weekly based on historical sales surges and anticipated high expense dates.
Negotiate favorable terms and discounts with your suppliers and vendors.
Minimize expenses without impacting quality or service.
Set measurable goals for your sales team and offer the training and tools they need to reach them. Inspire your sales team while holding them accountable to established key performance indicators (KPIs).
Strong Management Team – Although building a strong, loyal, and motivated management team is no easy task, it will be a real asset to the business. Strong management teams enhance value and reduce risk while building and nurturing the company culture. Rather than relying solely on the owner, active managers share day to day operational tasks to keep the processes running effectively.
A highly efficient management team should consist of a Chief Sales Executive, Chief Financial Officer, Chief Marketing Officer, Director of Human Resources, Chief Technology Officer, and you, the Chief Executive Officer. A strong management team frees up the owner’s (CEO’s) time to focus on building the business.
Make sure non-compete agreements and employment contracts are in place for the Management Team. Without these, discounts can be applied to the value of the business, decreasing their perceived value.
Strong Policies and Procedures - Every business needs strong policies and procedures put in place to increase its value. Questions you should consider are: If you were to sell your business today, could the new owner pick up a manual and continue the flow of the company? Are there departmental systems in place? Could the business keep running if any employee resigned? Is there a risk management procedure in effect?
Create a policy and procedures manual encompassing every department in the business.
Create a risk management plan.
Dependable Financial Records – Precise financial records should be kept annually and should stand up to any business due diligence investigation. Keeping accurate financial records is extremely helpful when preparing tax returns and annual reports.
Check your financial status regularly. Every business owner needs to know the financial picture of the business regularly, including daily, weekly, monthly, quarterly, and yearly reports.
Conduct regular inventory checks. Be sure to know how much inventory is on hand and how much you need to order.
Your CFO should be able to answer these questions and produce the necessary reports and documents for you, hence freeing up your time to manage the business.
Diversified Customer Base - Do not depend on one customer or client for the success of your business. For many small to mid-size companies, one or two large clients make up the bulk of the annual sales. Does your company have individual clients who make-up at least 10% of the entire income? If so, your business is at risk because the company is in a vulnerable position. What would happen if these customers leave? It is possible that with their departure, the business may go from thriving to diving. Creating a broad customer base is essential to the success of your business. Here are a few ways to grow your customer base and avoid losing value because of a limited customer list:
Seek out diverse customers to enhance business growth.
Market your business with social media, public relations, networking, speaking engagements, and ad campaigns.
Promote your brand and become the ‘thought leader in your industry
Continue to keep your loyal clients happy while delivering on your promise. This promise will eventually help gain their referrals.
Growth Potential – To drive value, there needs to be a written strategic growth plan that outlines the company’s future and identifies possible new opportunities for growth.
Create a business plan and review it regularly. A business plan can help allocate resources, keep your business on track, and reach new depths.
Look for ‘blue oceans’ – new product innovation or differentiation.
Property, Plant and Equipment (PP & E) Condition – All property, plant, and equipment should be maintained and organized, as they are vital assets to the business operations. They cannot be readily liquidated; therefore, they should be kept to drive value.
Business ‘Goodwill’ – Goodwill is an intangible asset that influences value. Brand recognition, longevity, reliability, reputation, future growth, and customer satisfaction are all sources of goodwill. Goodwill is a crucial asset to the business when determining its value because it helps create the true worth of a company, not just its physical assets.
If your business has trade secrets or ‘secret sauce,’ remember these formulas, methods, ideas, lists, and practices create value for your business. Protect them by putting precautions in place.
Keep the business reputation – reputable.
Create a loyal staff, who will add value to a potential buyer
State confidentiality measures in the employee handbook and non-disclosure agreements are signed.
Barriers to Competitive Entry – When valuing a company, one factor that you must take into consideration is whether there are any barriers to competitive entry. To enhance the value, you should be addressing any intellectual property, proprietary databases, or licenses you own. Less competition provides a higher premium, therefore increases your company’s value. Buyers will pay more for a business that has barriers to competitive entry.
Create a patent or proprietary technology.
Create a blue ocean – become a moving target with ongoing innovation.[i]
Product or Service Diversity – Does your business offer a variety of products or services? The more that your company offers within multiple industries, the higher the value will be perceived.
Diversify your revenue and profit centers, but remain focused on your business. Know who you are and what you offer to your clients. If you are a toy manufacturer that focuses on buildable toys, you may want to consider adding different types of toys to your line. Maybe those that encompass all five senses. The key here is that you are still a toy manufacturer; however, you have ventured out to create different toys.
Company Culture – Although quite often overlooked, I find this driver to be of utmost importance. According to Booz & Company’s Annual Study, they defined company culture as “the organization’s self-sustaining pattern of behaving, feeling, thinking, and believing. It trumps strategy and leadership.”[ii] When corporate culture aligns with company strategy, then happy, loyal clients flourish. For example, company culture can transcend by knowing that your company is providing exceptional product quality, outstanding performance, and extraordinary customer service. When these three components, along with employees, whom all share the same ideology intersect, then long term value can be optimized.
Although these eleven drivers only touch the surface regarding accelerating business value, they can serve as a starting point for any business optimization. These standard drivers can be broken down into specific buckets tailored to your company to help maximize cash, minimize costs, and grow your business. Remember that all value drivers must align with the company’s mission, vision, and culture to drive value.
For more information on business strategy and value drivers, call us (973) 545-2891. Visit our website at www.RedMapEcon.com
Sources:
http://www.fairmarketvaluations.com/upload/Value%20Drivers%20for%20a%20Business.pdf