Maximise the value of your business Part 1 – Business value: what it is and how it’s determined
Why are some companies are more valuable than others when they all have access to the same talent, resources, clients and knowledge?
It’s a big question, so we’re going to tackle it in an eight-part blog series. Over the next few weeks, we’ll look at exactly value is, what drives it - and how you can maximise it.
Would you buy your business?
To focus your mind on the value of your business, imagine for a moment that you want to sell it and put yourself in your potential buyers’ shoes. To you, your business is the sum total of your hard work and dedication. It probably represents many a late night, some big personal sacrifices and no small amount of risk.
Very little of which will be of interest to your hardheaded business buyers. What they’re looking for are real commercial assets with clear profit potential.
V = P x M
When it comes to putting a figure on the value a business, the most commonly used formula is:
value = profit x multiple
Profit is your business’s historic financial performance. The multiple is its future earning potential.
Typically, most business owners see increased sales and improved margins as the way to raise the value of their companies. They’re focusing on the profit side of the equation.
However, when we work with clients who are looking to sell a business (and by definition maximise its value), we focus more on the multiple side of the equation. As you’ll discover throughout this blog series, driving the multiple is a far more effective way to increase business value.
Timing is also a factor. If you’re looking at your business in terms of its eventual sale value, you’ll want to move at the peak of its profit/multiple potential. Selling too early could mean selling yourself short. Wait too long, on the other hand, and you may not get the value you were expecting. I remember working with a business that had received an offer, yet decided to play the waiting game. Then the market crashed. The offer was withdrawn, costing the seller around £25 million.
Another consideration is the size of your business. If it gets too big, it could become too expensive or difficult to integrate for many buyers. While, on the surface, a bigger business may appear more valuable, it could narrow the field in terms of potential buyers.
External factors can also influence the value of your business at any given time. Market forces, exchange rates and pending government legislation can affect your profits depending on the products or services your business provides.
A formal strategy that systematically prepares your business for optimum growth at the right moment will help you get this balance right. Vision, purpose, value drivers, risk management, an understanding of your potential buyers’ priorities and your personal goals are the basis of this strategy - along with a plan to make things happen.
This will, of course, sound like mere common sense, possibly even obvious, to many of you. However, it’s amazing how often entrepreneurs and business leaders, when focused on driving value for their clients, overlook the needs of their own businesses.
In Part 2 of this series, we’ll look at the importance of your business’s vision and the benefits of a clear plan that all your stakeholders can buy into.
In the meantime, to talk about growing your business, call me, Dan Egerton on 07879 845845, or drop me an email.