Especially with all the uncertainty of today’s political climate, how ‘sellable’ is your business? If you would like to have the choice of selling in the future, consider 8 drivers that optimise the value of your business.
- Financial performance
Companies are generally bought and sold using a multiple of earnings. Financial buyers see businesses as streams of future profits. The absolute size of your business, turnover and profit, also affects the value of your business. Size matters, with smaller businesses appearing riskier than larger ones. The price an investor is willing to pay relates to how much risk they attach to future profit streams. The riskier the investment, the higher the return that an investor will demand and the lower the price. Action: Identify and pursue strategies to increase your profits and reduce risk of future profit streams.
- Growth potential
Acquirers typically pay more for businesses that have the potential to grow. What is your business’ growth potential? Action: Consider how scalable your business is – geographically (selling current products in other areas), horizontally (selling more products and services to your existing customers) and vertically (scaling up and selling more using existing infrastructure).
Saleable businesses are not overly reliant on any one customer, employee or supplier. If your business is reliant on one or two key suppliers, you are at their mercy. If you´re too reliant on any one employee, you are at significant risk if that employee leaves and disadvantaged when negotiating his or her salary. If you are too reliant on any one customer, your business risks instability. Action: Try to reduce your reliance – e.g. your largest customer should represent no more than 15 percent of turnover.
- Cash generating
Aim to create a business that generates cash as it grows. The more cash an acquirer must inject into your company when taking it over, the less that acquirer will pay for it. The inverse is also true: the less cash your acquirer must transfer into your business, the higher the potential price. Action: Identify the ways you can better manage your working capital so that you are best in class in your sector.
- Recurring income
One of the biggest factors determining the value of your company is the extent to which an acquirer can see where sales will come from in the future. If you are in a business that must start from scratch each month, the value of your company will be lower than if you have a recurring source of future revenue. Action: Increase the levels of recurring income e.g. service contracts and related works such as call outs, extra works and upgrades.
- Sustainable competitive advantage
Warren Buffett is famous for investing in companies that have a protective ‘moat’ – a clear point of differentiation. The deeper and wider the ‘moat’, the harder it is for competitors to compete. An enduring competitive advantage also gives owners more control over pricing, increasing turnover, profitability and cash flow. Action: Think less about how to compete on price and more about what differentiates your business from your competitors.
- Customer satisfaction
The extent to which your customers are satisfied and your ability to assess customer satisfaction in a consistent and rigorous way are very important to acquirers. Action: Have in place an objective way of regularly measuring the satisfaction of your customers.
- Lack of dependence on owners
To be valuable to an acquirer, your business must be able to succeed and grow without you being at the hub of all activities. Your employees must be more than spokes, must be able to operate independently of you. Action: Systematize your business and develop and empower your people to enable them to grow your business.
These 8 factors are adapted from “Value Builders” and the analysis of more than 20,000 companies.