If you ask most business owners what drives the value of the business, most will tell your first and foremost is financial performance. Financial performance is important but is only one of several variables that affect the value of your business. When it comes time to look at selling your business your business down the road, there is much more to it than just having steady revenue and a good profit margin.
Most businesses worry about the value of their business when they are ready to sell their business. Unfortunately at that point, it is way too late to make any changes. Instead, if you focus on the areas that drive your business value early on in your business, you have a better chance of receiving the value and earnings multiples you want for your business down the road.
There are other drivers that will affect your business value and the multiplier that you will eventually receive for your business that many business owners do not consider. To change many of these, it will take time, so it is important that you look at them early on within your business, so you are running your business in a way that if you had to sell it tomorrow that you would receive the value you deserve.
Dependence on the Business Owner
There are times we will ask a business owner how involved they are in the every day business including sales with clients. In some cases, the business owner will smile and tell you how they know every one of their clients by name and how the clients will come to them anytime they have a problem. In other cases, the business owner will tell you how they really can't afford to take a vacation as the business would stop if they were not there. Unfortunately, this is a problem as if the business revolves around the business owner, then this greatly reduces the value of your business, as the business is not worth anything without you in it. This increases the risk of someone down the road buying the business, because, in most cases where the business owner is ingrained in the business, there are not any documented processes and procedures. They usually reside in the business owner's head, so is not a business that could be easily transitioned. This will affect the value. This is why most service driven businesses do not obtain the same value and a lower earnings multiplier as a product-driven business.
Dependence on One or Two Key Customers or Employees
It is great to have large customers, but it is a problem when your business relies on one or two key customers where they make up the majority of your revenue. There is nothing that is a sure thing, and if something happens, one of those client's leaving could put you our of business. It is important to make sure that if you find yourself in this situation that you look at how to reduce your dependence on them through selling to additional customers, looking at other geographies, or even other products and services that you can sell as add-ons to other customers or new customers. This also takes time and may involve hiring sales reps or even to look for other products & services to develop or resell. This is not something you can change overnight, so it is important not to wait until your want to sell your business, as this will greatly impact the value you receive as this is a very high risk to the buyer.
There is a similar situation when your business is reliant on one or two key employees. If today you only have one sales rep, and they make all of the sales for your business and others in the business are not involved with the customer, this can be a potential issue as well. What would happen if something happened to this individual or they left tomorrow - ask yourself - would your business still survive? Do you have your customer list and contact information, or did that walk out the door? Reliance on any one person can have an impact on the value of your business as well. A question you need to ask yourself for each of your employees is if they quit tomorrow would your business be impacted.
Dependence on the owner, customers, and employees is just one other driver that will impact the value of your business, but as you can see by the examples, none of these items are things that you can change in your business overnight. It doesn't even really matter if you never plan to sell your business, as your business is exposed to risk in any of the instances and is something that should be part of your strategic plan to address.
If you would like to understand what the other drivers are or how your business would score today, take the time to take the Value Builder Survey and Get Your Value Builder Score.
If you are interested in increasing the Value of your business and would like to be added to our Value Builder subscription list where you will have access to presentations and newsletters with a focus on increasing your business value, send us an email.
RK Fischer & Associates