07 Dec How to discover the true value of a company
Some companies are built to sell from the very beginning, and others are sold after many years of sole ownership. According to a recent survey of entrepreneurs who’d sold businesses, only about half where satisfied at the end of the process. While it’s easy to understand income statements and balance sheets and their effects on a company’s value, there are other ways to increase it without raising profits or revenue. An owner must meet certain criteria if they want to create a valuable company. In this guide, readers can learn some of the key factors that make a business valuable to the owner and to others. Also interesting: how a secure dataroom can help in buying and selling transactions.
Business Value Drivers
Businesses have many parts, but five are fundamental value drivers. These factors create the company’s value, and they ensure that the owner is running the business in a healthy, strong way. They are:
- Customer value
- Organizational value
- Employee value
- Financial value
- Strategic value
In the sections below, business owners can learn about each of these value drivers.
A big part of the company’s value is in its ability to meet the demands of its current customers, as well as those gained through the years. This is one of the most challenging areas for small business owners; after all, they want to build strategic relationships with customers so they rely on a single company to meet their needs. According to the valuation expert, if a single customer makes up more than 10% of a company’s revenue, or if most customers are from the same geographic area, there may be diversification issues. Outside of the above issues, consider these factors:
- Whether the reasons why customers prefer the company provide a long-term competitive advantage
- Whether repeat customers make up a significant portion of the company’s revenue, and how much new business the company gets each year
If a company isn’t well organized, it doesn’t present much value to the owner or a potential buyer. Owners should focus on how important files, documents, and records are stored. If procedures and processes are highly repeatable, mistakes are minimized in the short term, but there may be long-term competitive advantages. Automation can drive a business’ value as well, as long as efforts are focused on high-impact areas like customer information. Contracts, legal agreements, and partnerships are crucial, and an agreement drafted by an attorney is typically more valuable than one written by a business owner. When a company is properly organized, there’s something of value that’s worth protecting.
Finally, automation can help drive more value for your business. Have you automated those areas that can be easily automated and that actually minimize manual work? In order to avoid spending a fortune on the automation of processes, focus only on those areas with high impact, such as customer information.
While an owner can be an excellent leader, it’s important for the company itself to have the skills, knowledge, and leadership needed to ensure future success. If an owner can’t step away for a few months and return to a functional company, they need to build their employee base. Every company should have at least one person who can take over when the owner has relinquished control of the business. If a small business can work without its owner, it’s more likely to be successful and valuable.
This is a value driver of which most people are aware. It’s easy to understand and simple to quantify, and it’s a hot topic during discussions of value. To grow in this area, owners should work on budgeting processes and they should strive to become more competitive. When a company’s comparative and historical financial trends are in line with other industry names, the business is more likely to hold its long-term value.
While big tech deals make the news, they can set business owners’ expectations unreasonably high. Newsworthy deals are the exception rather than the rule; most corporations are valued based on sales and profits. Smaller companies are often valued at lower levels due to higher perceived risk. In these cases, bigger may be better.
Every business owner wants to set their company apart from the competition, but it’s important to focus on sustainable strategies. Concentrate on factors like:
- Brand recognition. Are the business’ products and services recognizable in the marketplace?
- Entry barriers. Do any barriers exist? Are they a natural part of the marketplace, or were they created internally?
- Business plans. No matter how fluid it may be, every corporation should have a guide that’s adjusted and updated at least once per year.
- The market. If the company doesn’t serve a growing market, it’s not likely to be very valuable.
Growth and Scalability
According to finance experts, a company’s rate of growth can affect its value. Investors prefer to buy companies that are highly scalable; otherwise, there’s no compelling reason to express interest or pay the asking price. While having several big clients is great for quick growth, they can create problems if they make up more than 15% of the company’s revenue. Any corporate sale carries the risk of attrition, and if a major client leaves, they may take most of the profits with them. While it’s not necessary to sever ties with a big client, it’s important to diversify and find more of them.
Positive Cash Flow
If a potential buyer has to invest above and beyond the purchase price to bring the company to its maximum value, they may try to negotiate for a lower purchase price. High-value companies are those that can internally finance growth, and the only way for an owner to do that is to build a positive cash flow. By focusing on efficiency and cash management, a business owner can get his or her company valued at top dollar.
When businesses focus on encouraging repeat business, they’re more likely to be successful. If a customer has to renew, they’re more likely to stick around, and the owner saves on acquisition costs. Companies with low attrition and recurring revenue provide a valuable model that attracts buyers looking for a low-risk, long-term venture. If the company is just barely breaking even, the owner should find ways to make their products essential and renewable.
A One-Of-A-Kind Value Proposition
Commodity-based businesses often bring a lower value because they work on lower margins. Competitive advantage is the only way to create entry barriers and justify premium pricing. If competitors can’t match a company’s differentiation without investing significant effort, money, and time, a company becomes more valuable to potential buyers.
For long-term success, business owners should concentrate on increasing customer satisfaction. While advertising is great, word-of-mouth and referrals are equally good ways to generate positive publicity for a business. When owners focus on growing their customer base, they’ll grow value at the same time. It really is that simple!
The Management Team’s Strength
If an owner wonders how they’ll accomplish all these goals, they likely don’t have the proper management team. When the owner is the only one who makes things happen, the company provides limited value to customers. Buyers want to invest in companies, not people; save the sales tasks for the company’s eventual buyer.
The Company’s Central Purpose
Brands achieve success by defining their identity and purpose in a memorable way. The world’s most valuable companies have a purpose, such as how they can solve customers’ problems and improve their quality of life. Then, through effective advertising and marketing, the company clearly communicates its purpose to its customers.
Authenticity is particularly important in social medial marketing, because it allows the audience to relate to the company. Companies can increase their value by building trust with customers. Authentic messaging aligns the brand’s voice with its mission statement, morals, and values, and it’s a great way to bring in more customers. To be successful and build value, the company has to communicate effectively. The best companies respond to complaints and questions promptly, and they build trust by conversing with customers online and in person.
As said earlier, if a company stands out from the crowd, it automatically becomes more valuable. Today’s top companies focus on building the customer experience from the ground up, in a way that’s completely different from their competitors. A comprehensive experience is one of the most effective ways for a company to gain customers’ loyalty and increase its value.
A Targeted Audience
Advertising and marketing efforts that are targeted to big audiences usually aren’t that effective. Today’s consumers are more savvy than ever, and they expect their problems and questions to be answered directly. Rather than trying to make a message cover a wide segment of the market, businesses should create buyer personas that target certain demographics. When companies deliver customized messages, they build lasting relationships and they build value as well.
While a company may not be as valuable as Google, it’s still important for owners to make efforts to increase its value. By considering these value drivers and following these tips, owners can start on the path to increased value and prosperity.