small business value drivers

Business Value Drivers

Technology

Technology is an important tool that can improve a company’s performance and competitiveness. Some companies lack the resources to update technology and therefore find it difficult to keep up with the technological changes in their markets. On the other hand, other companies manage to keep pace and are aware of changes to their market and respond accordingly to the needs of their potential customers. Technology cannot be controlled, and all businesses should embrace it (to varying extents depending on the industry) and seek a way to take advantage of it to remain competitive in your market.

Questioning

  • Have you thought about investing in technology to remain competitive in your market by increasing your productivity?
  • Are you aware that you can increase the value of you company by becoming innovative with technological changes?

Impact On Your Business

Nowadays, technology can improve the productivity of your company and help it remain competitive. However, technology often requires an upfront investment that your company may not be willing to pay. A cost benefit study on the upfront and ongoing costs of implementing a new technology, against the forecast productivity increase should be performed. Technology often also influences and improves communication in your company. You should analyse if your internal and external communication channels are functioning efficiently. Technology can be used to enhance the delivery of messages, facilitating meetings more easily or for the lubrication of idea generation. Improve the efficiency of operations by saving time and money by leveraging technology. The bottom line is technology is often a trend that cannot be controlled, is often resisted and resented by both employees and business owners alike. However, careful analyses should be performed to identify if you should leverage technology further to remain competitive in your industry.

Intellectual Property

Intellectual property (IP) are intangible assets with value that are creation of human intellect or the human mind. A firm can either develop or purchase its IP, with examples including inventions, processes, trade secrets and copyrights.

Questioning

  • Are you aware that protecting your IP can make your business more trustworthy to attract high quality partners due to the value and image of the business?
  • Have you thought about legally protecting your IP?
  • Did you know that financing can be easier if your business has identified and legally protected IP?

Impact On Your Business

Businesses should protect their IP to prevent the duplication, selling, manufacturing and use of the company’s creation by a different business. A business can protect its IP through legal channels and then displaying notices and markings on their creations/products to indicate patent, designs or copyrights ownership. Protecting your IP will improve the value of your business by legally securing your competitive advantage and reducing your operational risks (if a competitor steals your IP). Being aware of your competitors is also important to ensure they are not violating your rights and are copying your IP.

Customer spread

High customer concentration, or reliance on only a few key clients is a risk for a business if these customers represent a large portion of a company’s annual revenue. If a company was to lose a customer which accounts for a high percentage of the firm’s sales, this would decrease the firm’s revenue which negatively effects a firm’s valuation.

Questioning

Analysing and understanding who your top 5 clients are is a key part of assessing the stability and sources of a business’s revenue stream. Understanding your top clients and their share of revenue has various implications:

  • Have you considered the impact that customer reliance could have on the value of your business?
  • Did you know that diversifying your customer base will help lower your risk of potential revenue loss and hence improve your business’ value?

Impact on your business

If your business has a single client/ customer that represents more than 20% of the business’s annual revenue, this would often be identified as a potential risk, negatively impacting the valuation of a business. Businesses should look strategically at their client base and effectively expand, and or diversify their client base if it is determined their client reliance risk is too high. Alternatively, if clients are large and valuable in nature, having written legal contracts in place will lower the risk that client leaves, and with them the associated revenue stream.  This will not only improve the value of your business but will also help improve the sustainability of your business’ revenue.

Supplier Concentration

Businesses with high supplier concentration (most of their purchases come from a few key suppliers) have a higher risk of not being able to source essential goods or services, which are essential in producing what that business sells. When a business has limited supply options, this could harm the operation of the business if one of these suppliers is no longer available. When a firm has a diversified supplier base, this lowers the supplier risk to the firm as they are not too heavily dependent on each supplier.

Questioning

  • Have you considered the impact that supplier dependency could have on the value of your business?
  • Did you know that diversifying your supplier base will help lower the risk of your business? The optionality of using multiple suppliers lowers the risk to your business, should one of your current suppliers become unavailable.

Impact On Your Business

If your business relies on a few key suppliers that cover a high percentage of the business’s purchases, this would often be identified as a risk factor and hence this will negatively impact the value of the business. To overcome this issue, where possible, the supplier base should be broadened to diversify the risk to your business’s daily operations. Furthermore, this may also benefit your business if the increased competition between suppliers forces them to introduce the best deal for a business.

Goodwill

Personal goodwill relates to the abilities, skills, knowledge, experience, customer relationships, and the reputation of the directors within a business. Personal goodwill is attached directly to a person and is predominantly non-transferable.

Questioning

Have you ever considered the impact that Goodwill has in your business?

Are you well aware that if owners/directors leave the business, this could be a risk factor that will directly affect the valuation of the business for a potential sale?

Impact on your business

Businesses should have a well-designed management structure in place, who are not the directors or shareholders of the firm. If this is not the case, the directors of the firm should look to ‘work themselves out of the business´ so they are not essential to the daily operations of the firm.

Employee Turnover 

Employee turnover refers to the number of employees who leave an organisation during a specified period. A high employee turnover rate increases the risk of disrupted operations, often leads to increased staff procurement and training costs for the organisation, loss of knowledge capital, and negatively impacts firm culture and staff morale. These outcomes will negatively impact the value of the business as they lower the probability (and thus increase the risk) of sustainable profitability and growth. Hence businesses should avoid having a high employee turnover rate by ensuring the desired workplace for staff members.

Questioning

  • Have you considered what your staff/ employee turnover rate is? And the impact it could have on the value of your business?
  • Have you thought about how to improve your employee turnover rate? What are the positive factors that currently keep your employee turnover rate down?

Impact On Your Business

If your business experiences a high employee turnover rate, this could negatively impact the value of the business. Businesses should avoid this by creating an environment where staff feel valued, motivated, and have overall satisfaction in their job. For example, providing options to improve their professional skills, having regular and meaningful discussions about performance, motivations, tasks, direction, company culture, goals, and objectives (both short and long term). Promotions, compensation, recognition, and constructive criticism are all important discussions for all employees, which will help to create a great work environment and increase the value of your business.

Length and Price of Lease

Leases can be essential to the core operations of a business. In establishing this, a key question when assessing a business lease is: is this location important/key to the core operation of the business?

The length of a lease could define the permanence of the tenant depending if it is a short-term or long-term lease. A short-term lease will affect the future operation of the firm if they need to relocate and hence this will increase the risk of the firm. On the other hand, a long-term lease will guarantee the tenant’s permanence, lowering the risk there is any disruption to current operations.

The ‘fair market value’ can also impact the value of the firm. With short-term leases, landlords may increase the value of the rent given the shorter time frame. As a result, often long-term leases will be cheaper than short-term. Ultimately, it is important to assess the pricing of the lease for the time remaining and how these terms compare to what a ‘fair market value’ is.

Questioning

  • Have you considered how the length and price of the lease could affect the future operations of your firm?
  • Have you thought about lowering this risk of your firm by ensuring a well-written contract with all important factors clarified?

Impact On Your Business

If your firm either has a) a short-term lease with your current location key to your operations, and/or b) a lease with a price above ‘fair market value’, this will have a negative impact on the value of your firm. To avoid this, tenants should be aware of fair market lease values and consider appropriate leasing timeframes, before signing the contract. If the lease and business premises are essential to the core operations of the firm, then the tenant should extend the leasing period as much as they can, to lower risk which will positively contribute to the value of the firm.

Quality of Financial (Accounting) Statements

Quality financial statements prepared by an accountant are essential to every business. Well organised, accurate and real time information will only improve the reliability and value of financial statements, which are used to analyse the finances of a business. Having high quality accounting statements enhance internal decision making by the Owners / Directors / Management of a firm. Whilst they also enhance external decision making, for example, assisting a potential buyer in justifying a firm’s sale price and giving the potential buyer more confidence around the reliability of the financials. This is imperative as confidence that the financials of the business are actually what the financial statements say, is not taken as granted and adds significant value to your business when taking it to market.

Questioning

  • Have you thought about improving your financial statements to increase the marketability of your firm as a sales prospect?
  • Have you considered how your financial statements can be used to make better internal managerial decisions?

Impact On Your Business

You should ensure your firm has all their financial statements completed in full, accurately and in a timely fashion, in order to enhance better decision making and increase the credibility of the financial statements, should you want to sell your business now or in the future. For this purpose, a business should have its accounting statements audited by an accountant or financial analyst to ensure all accounting procedures are being followed and completed. Information such as company tax returns, sales records, expenses and other supporting documentation will be used in the construction of the financial statements, which will positively contribute to the value of the business. This will then allow future buyers to perform thorough due diligence, giving a potential buyer more confidence about the reliability of the financial statements.

Contracts and Relationship with customers

Well managed contracts make it easier for customers to do business with companies by clearly defining the rights and responsibilities of both parties. Nonetheless, some businesses by nature do not require a written contract for their daily operations. A company (for example a food or retail business) with a large diversified client base does not require a written contract for each customer. However, for businesses where there is repeat business, or the product or service is of a high value or a very specialised nature, contracts lower the risk of these transactions to both the customer and supplier alike with contractually defined terms and conditions.

Questioning

  • Have you thought about introducing written contracts to improve customer retention and increase the value of your business?
  • Have you considered how losing uncontracted customers could negatively affect your revenue and the value of your business?

Impact On Your Business

If your business does not have well written contracts to retain customers (assuming it is appropriate depending on the nature of the business), this could negatively affect the value of your business. For this reason, to lower the risk and overcome this issue, you should request that new or existing clients sign a formal contract in which both parties will come to an agreement based on terms and conditions negotiated that ensure a transparent business relationship between both parties. Most of the time, companies issue contracts only to new clients to avoid damaging existing relationships built on trust. However, transitioning existing large clients onto formal contracts if managed with care, alongside contracts for all new clients, will contractually guarantee your revenue streams, which lowers your business’s risk and thus increases its value.

Geographic Location

Location plays an important role in businesses that operate in certain sectors. In determining if it is key, it depends on which business you have and if the location is important and imperative to the core operation of the business. Location is often important if you have a retail or manufacturing business in which you will have to distribute a physical product as part of your daily operations. On the other hand, if your business is online and information or service related, location and where you work from is often not very important to the success of the business.

Questioning

  • Have you considered the impact that geographic location can have on your business?
  • Before selling your own business, have you thought about analysing if the geographic location is optimised given the nature of the business?

Impact On Your Business

Regardless of the nature of your business, careful analysis of your business’s location and if the location is necessary for the success of the business should be undertaken. Moving the location of your business after realising its importance could be time consuming and very expensive. Therefore, it’s necessary to invest time beforehand to avoid having issues in the future. If you currently have a retail, commercial or industrial business, be aware of the impact that location could have to the value of your business. For example, industrial businesses should look for a place in which they can benefit from space and easy routes for transporting commercial supplies from one place to another. Whilst retail businesses should be aware of the location where their target market is currently located to attract potential clients. Optimising these decisions takes forward thinking and planning. However, it is vitally important as location can significantly influence the value of your business.

Size and Stability of Revenue

Revenue is the income generated from all the activities of a business such as product sales or service fees. Generally, a business that has higher revenue compared to other businesses will be more valuable and attractive to potential investors, all else equal. Whilst having stable and reoccurring revenue streams will increase the sustainability and value of your business.

Questioning

  • Have you considered the volatility of your revenue streams and the impact that has on the value of your business?
  • Have you tried to increase your revenue, gain more market share and increase the probability of ongoing success for your business?

Impact On Your Business

 Owners should analyse the business’s revenue and see if revenues have been growing, making relative comparisons both month on month and year on year. Growing revenue does not guarantee growth in the future; however, it is a good indicator of future growth as it represents the demand that customers have for your supply (of products or services). Businesses that have high levels of revenue historically have shown to have longer lifespans compared to businesses that have less revenue and thus are smaller in size. After analysing the trends in revenue growth or decline, management should look to grow their revenues where possible by developing different strategies such as a) increasing the number of potential customers, b) improving customer service, c) raising prices if possible (carefully considering things like the market supply and demand conditions), and d) trying to sell products and services that by nature lead to high quality reoccurring revenue streams.

Growth Prospects

A firm with high growth prospects is a much more attractive acquisition prospect than one without. A business with higher realistic growth will benefit from higher valuation multiples due to the company’s expected performance and growth, whenever the business undergoes a business valuation.

 Questioning

  • Have you thought about the growth prospects of your business and how you could sell these to a potential buyer?
  • Have you considered how you could execute your growth opportunities, possibly working with a strategic partner or investor?

Impact On Your Business

Owners should be aware of the importance of growth prospects in a business as for many potential buyers, potential growth is the main thing they are looking for. To improve your growth prospects, you should develop a business plan that will focus on the channels available to grow your business. For example, this could include an analysis of the existing market in which your business is currently operating, or a potential new market. When you conduct a market analysis, it is important to focus on new opportunities and threats. For instance:

  1. a) new consumer preferences, needs and wants that need to be supplied;
  2. b) be aware of new competitors that are entering or could enter and develop a competitive advantage that will differentiate your business from these threats; and
  3. c) Leverage new technological changes that may increase your production and hence improve your growth prospects.

Such analysis will outline the growth opportunities. A plan needs to be developed detailing how you as the existing owner can execute them, or if trying to sell your business, highlight to potential buyers how they can execute these opportunities, to maximise your business’s value upon sale.

 

 

 

Author

InteleK Australia

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