The value of your business is most likely to be dictated by how much it will make an incoming investor in the future, writes Stewart Bell
For many owners, a business is more than just a business. It’s often a labour of love, a nest egg, an investment of time, a social life, a series of personal achievements, an expression of personality and even a small part of ourselves. It’s only natural to want to others to place a high value on that.
One of top ten questions Elixir coaches get asked relates to businesses valuations. There are numerous reports and regular market commentaries freely available on average multiples and general trends. However, it’s a subjective topic which often simply comes down to what others believe it’s worth to them. However, there are some core factors that even the most subjective valuation model can be generally relied upon to recognise.
Ready?
Before we start talking specifics, we need to first assume you’re at the stage where it’s “right” to worry about business value. By that I mean your business is financially self-sufficient, you can afford to pay yourself a market salary and the days of worrying about income are behind you.
However, simply being financially stable isn’t necessary enough. Achieving maximum valuation also means that you’ve ‘cracked’ a business model that enables you to deliver a consistent service that clients will buy and you make a significant margin on.
Many businesses confuse longevity with maturity. Sometimes when we look inside an established firm, we can discover there is no “core formula” to their success. Many produce highly inconsistent margins across their service proposition and are purely reactive to whatever opportunities arise. Often, they grew before they’d thought about how to sustain that growth. These businesses are valuable, but there is another level.
Model first, growth second
Conversely, businesses that cracked their business model first (usually through five or six incarnations) then put the foot to the floor are far more likely to be in the sweet spot for achieving top dollar.
In which case, having demonstrated the ability of your model to achieve consistent historical returns, it boils down to one over-arching consideration. Ultimately, the value of your business is most likely to be dictated by how much it will make an incoming investor in the future, and how predictable that figure is.
Seven key factors
In which case, there are seven key factors that can maximise your chances of pulling a big number.
- Continually increasing profit – this is not just about the number, it’s also about upside. Nothing brings down a valuation faster than a principal who is clearly over the business and ready to get out. Conversely, if the outlook for your business is strength-to-strength, the valuation is logically more likely to be heading north.
- Defensibility and differentiation – how easily could another business replicate what you have done? Positioning yourself in specialist niches, offering a distinctive range of services, diversifying your revenue in a smart fashion, using technology well or developing a signature “way” can show it makes more sense to pay a premium to buy your model than try to replicate it. It also serves to protect your business from competitors.
- Great governance and reporting – the easier it is to understand and run a business once inside, the more attractive it is. Information is power in this regard. It’s a well-worn saying not to invest in anything you don’t understand. Company accounts might confirm a story, but great data that delves beneath the numbers and confirms a structured business model is what people pay big bucks for. As a minimum, you want to have ready-to-go at a moment’s notice your last three years financials, any relevant legal documentation (leases, loans etc), adjusted income to account for full cost of your services, history of the business, employee files, important attributes about the business and surrounding area, what you would recommend to a new buyer to increase business once they take over, the competition and all client contact info – ideally including an up-to-date CRM showing service levels and dates of contact.
- Brand and reputation – the greatest fear of most incoming investors is that the success of the business they are buying is based upon some secret ingredient that exists only in the DNA of the former owners. Whilst it’s unrealistic to believe that key person dependency can ever be completely offset in a relationship-based business, having a brand that isn’t individual-dependent will make the world of difference in offsetting that concern.
- Systems and processes – they may not be sexy concepts, but its ‘boring old fundamentals’ like these that give solace to investors and add value to the business.
- Formal contracts with clients and suppliers – “No man is an island,” says the phrase. The same is true of businesses. Formalised agreements relating to suppliers’ part in making your business an ongoing success is important. A structured service offer, formal client service agreements, proof of regular client engagement and client feedback results show an ability to sustainably manage client expectations, regardless of whatever legislation does.
- A great management team – ask any M&A person what dictates corporate value and very early on in the conversation the topic of management will come up. Advice businesses are not that different. Experienced, capable, performing individuals, who are invested in the future success of the business, will demonstrate a stable, ongoing concern that will withstand the loss of the founding principals. In contrast, a roll call of former junior staff that left nothing but footprints and old payslips can be an indicator that the business is dependent on key senior people who don’t know how to delegate.
