The value of a company extends beyond the amount of revenue it generates. As a business owner, you should be monitoring the value of your company at all times, but it is especially important if you are considering exiting or retiring within the next several years, or even up to a decade from now.
Company valuations are based on far more factors than just financial statements and multiples. The process involves the forecasting of the future of the business based on several key value drivers. Sometimes these can be sector-specific, but there are many core drivers that apply to any type of business, as outlined below.
1. Financial Health
We'll start with the most obvious factor that drives business value. A thorough financial analysis will identify assets and liabilities, measure trends, and compare the financial performance of the business to other similarly positioned companies. Potential buyers will be concerned with the firm’s liquidity, activity, profitability, and solvency measures. Additionally, the business’s accounting practices will matter to buyers to ensure the quality of the data, so it will be important for them to understand what financial controls are in place, and if the practices are internal or external.
2. Access to Capital
In order for a company to achieve its goals, it must have adequate access to capital. Usually, smaller companies have less access to debt and equity capital. Factors to account for include how the company is currently leveraged, how bank covenant restrictions may impact the business, whether shareholders have to provide equity or personally guarantee loans, and if bringing in outside investors could be an option.
3. The Market
Every company is affected by economic trends both overall and in the sector in which it operates. There needs to be a careful assessment of how the sector is impacted by these trends and how they could in turn affect the business’s future. The company’s market share should be considered, as well as its position on the competitive landscape, and how this can be improved through more unique and diverse offerings that can make the business stronger and more able to withstand economic swings.
4. Economies of Scale
Economies of scale occur when there are operational efficiencies, such as specialization and division of labor, that make a company more productive, which lowers the cost of each unit produced. Economies of scale can create value for private equity engaged in a "buy and build" strategy. For example, a PE firm will buy a sizable company to use it as a platform for other tuck-in acquisitions. Increasing the size of the overall organization and offering similar services and products can create considerable economies of scale because overhead can be improved and existing infrastructure can be used for the larger entity without adding significant costs. As a result, unit costs can be lowered and margins can be improved, creating more value.
A business’s employees are its lifeblood. Their skills, knowledge, training, experience, and creative abilities—as well as a healthy company culture—are all key drivers of value.
Areas that also make an impact are quality control measures, efficient capabilities, the overall management, key person dependencies, and customer relationships. It can also be a boost in value if there is a clear management succession plan in place.
6. Customer Base
A company’s customer base should be steadfast and diverse for its ongoing viability. Customer loyalty is a wonderful thing, but you don’t want your base to be comprised of only a few customers that account for the largest amount of revenue. This causes a dependency that can be very risky should you lose one of them. Consider what percentage of revenue is recurring, and how much your top three to five customers contribute to your business’s revenue, and how this ratio can be improved.
7. Product or Service Offering
An important factor in company value is your mix of products or services that you offer. If you have a specialty business that operates in a niche, this concentration can be a strength—and a weakness. It gives you a designated place in the market with a very specific customer base, which is great. But, at the same time, be aware that a lack of diversification can create too much dependence on limited markets and industry shifts. Key customers may seek out suppliers who offer a range of products that benefit them. Increasing diversification and vertical or horizontal integration lowers risk, which boosts value.
The strength of your brand can be a major driver of value. High market recognition is important to increasing and maintaining sales. Are you doing everything you can to best market your business, such as exploring all marketing channels to determine which are most effective for you, such as social media presence, website effectiveness, and customer relationship management? A strong marketing plan will also provide clear direction for strategy and improving operational efficiencies in line with the company’s mission, something prospective buyers surely value.
9. Strategic Vision
Because the valuation of a business is so much about future expectations, a long-term strategic vision is essential to creating value. Step back and look at the big picture of your company to craft a strategic vision that can be sustained beyond your exit plan, offer continuity, and increase profits. If you have an existing business plan, assess whether it is still relevant or needs to be updated. If you do not have a formal business plan, then you need to create one.
Research and development (R&D) is important for a company to keep pace with technological advancements. This does, of course, cost money. But the risk of your business becoming obsolete is also pretty costly. In order to maintain market share, create future growth, and meet emerging customer needs, you will need to take the necessary steps to ensure that your company remains innovative, especially if you share a market with larger corporations that can afford to throw money at technology. You should have a solid plan for smartly investing in the right technologies so that what you spend will actually translate to a benefit that creates more value for your business.
How We Can Help
For your company to remain successful, you should always be monitoring the health of your key value drivers. If you would like to explore more options for growing your business, our M&A experts a Benchmark International are here to help.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.