How do Value Drivers affect your business’ value?
The business environment today is not just about sur-vival, it’s about focusing on and creating sustainable
value. But which elements of a business are capable of creating value? Equally important, which elements of a business are capable of destroying value? Proper business planning is the process of uncovering and identifying what creates and drives value.
This is especially important when considering a sale. Business valuation is a relative thing. In addition to considering the company’s pure numbers, from gross sales to recast earnings, you need to understand the environment in which a company operates.
Once Value Drivers are identified and enhanced, solid decisions can be made surrounding your business. The benefits are numerous, but the primary three include the increase in margins and profitability, the enhancement of the actual and perceived market value and the ability to defend a premium asking price.
Value Drivers are now considered a fourth category of performance variables, along with accounting indicators, economic indicators and market indicators. However, Value Drivers are at the root of your business performance because they are frequently "leading indicators" of performance, namely future performance. Financial indicators are "lagging indicators" due to the recordation of past performance.
Over 26 Value Drivers have been identified in businesses, but typically no more than 8 to 12 are critical in any given business. Below are the most common 10, each accompanied by a question or two to both help clarify its importance and support the perception of your own business.Management depth: Can the company operate without you, the owner, for more than a week or two? Is there any cross-trained management to fill in if you are gone?Customer diversity: Do you have one or two major customers that account for more than 50 percent of your gross sales? What would happen to the value of your company if you lost one?Owner involvement: Are you the "rainmaker" in the business? Does everything from sales to production revolve around you and your decisions? How difficult would you be to replace?Competition: Does your company compete in a clearly defined market niche that is defensible? Or, have your products or services become a commodity that is becoming more difficult to defend?Customer satisfaction: Are your customer relationships based on great products and service, or lowest price? How long and what type of history have your customers had with you? Are they satisfied and loyal?Human capital: Outside of ownership, are there people in place whom you can rely on and are who capable of doing their job day in and day out? Are they considered knowledgeable for your industry and would they stay after a transition to a new buyer?Financial history: Are your books accurate and up to date? Over the last few years are there patterns of growth or decline? If in decline, are there good reasons?Operating efficiencies: Does your company have documented systems and procedures for sales processes, training, HR issues, worker’s compensation claims, etc.? Is the general operating mode one of managed chaos or would you consider it organized? How would it appear to an outside third party?Recurring revenue: Does your company have any "handshake" sales arrangements that can be broken at any time? What percentage of your future income is solid? What percentage is totally unclear?Professional sense: As your business has grown, have you relied more heavily on your legal and CPA consul? Are you operating as you did years ago when your company was much smaller?
Interestingly enough, these, and many more, are the same types of questions that any potential buyer will ask when starting to value your business beyond just the numbers. Be assured, solid answers to these questions are of utmost importance when determining the strength, overall market value and the perceived value for your company. Time spent now to develop sound answers will reap many rewards in the future.
Jeff Kraai is president of Exit Strategies, specializing in confidential business sales and retirement transitions. He can be reached confidentially at 360.696.5812 or at email@example.com.