“Business is a good game, lots of competition and a minimum of rules. You keep score with money.” — Nolan Bushnell
Today’s business environment is not just about survival, it’s about focusing on and creating sustainable value. But, which elements of a business are capable of creating value? Equally important which elements of a business are capable of destroying value? Proper business planning is the process of uncovering and identifying what creates and drives value.
Start by using the SWOT Analysis – Strengths, Weaknesses, Opportunities and Threats – this will help you name the “value drivers” for your business. With this approach, you can focus on key value drivers.
There are many Value Drivers that have been identified in businesses. But, typically no more than 8-12 are critical in any given business; here are the most common 8.
Financial History: Are your books correct and up to date? Over the last few years are there patterns of growth or decline? If in decline, are there good reasons for the decline? Accurate and current financials are important to decide how the company fares in its industry and among competitors. A comparison to industry ratios can find strengths and weaknesses in the business.
Management Depth: Can the company run without the owner, for more than a week or two? Is there any cross-trained management to fill in if you were gone? What is the average age of management? Will they retire soon? What levels of experience and education do they have? Having a good management team can add value to the business.
Customer Diversity: 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? Are most of your customers considered “blue chip”? A good overview and a rating analysis of the customer base can be beneficial not only for added value but is crucial for where, how and when you advertise, not to mention a better understanding of your accounts receivable and aging.
Owner Involvement: Are you the ‘rainmaker’ in the business? Does everything from sales to production revolve around you and your decisions? How difficult would you be to replace? The more the business depends on you, the owner, the more likely the value will be lowered. One of the things I see the most is that over the years, the business owner and number one sales person is now an office manager. Maybe it’s time to get back out in the field with your sales people or give ongoing sales training.
Competition: 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?
Customer Satisfaction: Are your customer relationships based on great products and service, or lowest price? How long and what type of history have they had with you? Are they satisfied or loyal? Do you have systems in place to show your customers and communicate?
Loyal Employees: Outside of ownership, are there people in place who you can rely on and are capable of doing their job day in and day out? Are they considered knowledgeable for your industry? Again, what levels of experience and education do they have?
What is the average length of employment among your staff? A responsible business buyer will be looking for opportunities where the current staff, especially management, will stay in place, after the current owner’s exit from the business. Having key employee contracts, non-competes, 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.
Proprietary Technology: 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 consultant.
Intangibles (intellectual property) and human resources (who go home at night) can be protected and leveraged through a combination of business strategies and legal protections. Business strategies include incentive compensation plans to recognize, reward and keep 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.
In conclusion, it’s easy to be distracted by all the demands competing for the business owner’s time and attention. To maximize the value and profitability of your company, you need to focus on the key value drivers – which may be intangibles and employees – as well as having up-to-date equipment and systems.