TOP 6 VALUE DRIVERS OF BUSINESS VALUE
When a financial buyer is contemplating a purchase, the number one metric they use to measure value is financial performance. It is important that the financial information being presented is accurate. Are your books accurate and up to date? Do you just do the minimum for financial reporting or do you have good, CPA prepared financials?
What about trends? Are there patterns of growth or decline in your business? If in decline, are there good reasons for the decline? Detailing these reasons is crucial. Accurate and up-to-date are important for determining how the company rates in its industry and amongst competitors. A comparison to industry ratios can identify strengths and weaknesses in the business. These factors have a significant impact on business value.
What is the experience level of the current management team? How long have they been with the business? Are they planning to retire soon? These are common questions asked by Buyers who are looking at a business. They often want to see an Organization Chart detailing key management personnel. The better the management, the higher the price tends to be. Also, if the business runs better in the owner’s absence than in his or her presence, it will be valued higher. What is the average length of employment amongst your staff? A responsible business buyer will be looking for opportunities where the current staff, especially management, will remain in place, following the current owner’s exit from the business. Having key employee contracts, non-compete agreements, but more importantly a loyal, dedicated staff that is committed to the company’s success regardless of ownership change will be highly valuable to a prospective buyer and thus reflected in a business valuation.
Competitive landscape is a value driver for a business. Highly competitive market segments tend to suppress prices while fragmented markets with little competition tend to bring premium prices. Does your company compete in a clearly defined market niche which is defensible? Or, have your products or services become a commodity that is becoming more difficult to defend?
If proprietary assets such as patents are sold along with the business it increases the value and price of the business. Often these assets are valued individually within the business valuation. Has your company developed a unique application, tool or technology as part of its ongoing operations? Does it give you a competitive advantage? If so, this proprietary innovation or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not have to be patented to carry value but privacy and confidentiality must be maintained. It is critical that non-compete and confidentiality agreements be strictly adhered to and enforced by the company, before and after a transfer of ownership. The benefits, application and purpose of your proprietary technology should be explained to a business valuation expert.
Intangibles, or intellectual property and human resources can be protected and leveraged through a combination of business strategies and legal protections. Business strategies include incentive compensation plans to recognize, reward and retain high-performing employees. Legal protections include requiring key employees to sign non-compete agreements, registering Trademarks and Copyrights, and taking steps to protect proprietary information/trade secrets such as recipes and formulas. Contracts with key players, including partners, customers and suppliers are also important.
High customer concentration levels have a negative impact on price. This is due to the risk imposed by a business having a single customer who can be lost which would be devastating to the business. Low levels of customer concentration are favorable to a higher value of the business. Do you have one or two major customers that account for more than 25% of your gross sales? What would happen to the value of your company if you lost one? A good overview and a rating analysis of the customer base can be beneficial not only for added value, but is also crucial for where, how and when you advertise — not to mention a much better understanding of your accounts receivable and aging.
The opportunity of the business tends to be value driver for strategic buyers. Strategic buyers buy a business more based on what they can do with the business than what the numbers show. An example of this would be a competitor buying out a competitor to increase market share. Companies also grow through vertical integration and acquisition of suppliers and customers.
These Business valuation drivers are important metrics to monitor when considering what will drive the value of a business. If you are considering a sale of your business or just curious, these can be used as benchmarks to help you increase the value of your business.
By Rick Krebs – Valuations Expert, CPA, Mergers and Acquisitions Professional, Business Broker. Rick Krebs brings a unique blend of sales, entrepreneurial, and financial experience to Business Sales Group. He began his career as a CPA, working in Nevada and Utah where valuable financial experience was gained. He uses those skills every day. He graduated with a Master’s of Science Degree and Bachelor’s Degree from Utah State University. As a business owner he started Liberty Mortgage, a mortgage bank licensed in 23 states nationwide. He eventually sold the successful company to an investor from California. Rick Krebshas been in the M&A space helping people sell their businesses since July, 2010. During his first year as a business broker with BRC, he listed and sold more businesses than the entire office combined.
As a sale-side and buy-side advisor for Mergers and Acquisitions transactions Rick Krebs’ advisory, accounting, and management skills are invaluable when advising sellers as they maneuver the intricate details of the deal through closing. Rick is also a CNA (Certified Negotiation Expert) which helps him negotiate the most favorable terms for clients in a transaction.