Drivers of Business Value
July 13, 2022 · 3 mins
Drivers of Business Value
As a business owner, when the time comes to sell you want to ensure that you can maximize the value of the business in which you’ve invested energy, time and money into building. Planning and preparation well in advance are crucial to maximizing the value of your business.
While every business is different, there are a number of common things buyers look for. Knowing what these are so you can create a strategy in advance to address any potential weak spots can help you drive up the value of your businesses when it comes to sell:
1. Human Capital – Having an experienced, committed management structure in place can have a significant impact on how buyers view the value of your business. A business lacking a strong management structure likely relies heavily on its owner which in turn can decrease value and/or limit the buyer pool if the owner plans on leaving after the sale.
Retaining key employees is critical in transitioning your business while at the same time maximizing value. Human capital has never been more important than what we are experiencing in today’s tight labor market. Many of the first questions prospective buyers have today relate to the management team and employees of the business.
2. Financial Performance – A company with strong financial performance in the years leading up to a sale will certainly assist in helping increase the value of a business. Strong financial performance includes, but is not limited to, revenue growth, recurring revenue (contractual revenue is a bonus), steady profit margin, and predictable operating expenses – all of which tend to lead to a positively trending EBITDA.
3. Growth Opportunities – Scalable businesses often have obtainable growth opportunities which are positive for driving business value. These opportunities are important to clearly highlight to potential purchasers. If an acquirer can introduce new products/services or expand into new markets in a cost-effective and timely manner, they may in turn be willing to pay a higher multiple when it comes time to purchase your business.
4. Diverse and Loyal Customers – A diversified customer base can reduce risk for a prospective purchaser. If your largest customer accounts for 25%+ of your revenue, losing that customer can have a material impact on the value of your business. “Sticky” customers are repeat consumers due to a business’s value proposition, including quality, convenience, pricing, etc. “Sticky” customers generally lead to loyal customers. A long-standing, loyal customer base can provide a purchasing party with certainty that the target’s customers are not likely to abandon the business in the case that the company is acquired by another party. Taken together, a diverse and loyal customer base will almost certainly help enhance your business value.
5. Supply Chain Management – You don’t have to look too far in today’s market to hear about supply chain issues. Businesses that have developed strategies to weather the supply chain struggles will set themselves apart from those that have stumbled, and thus will drive business value. Similar to the strategy mentioned above in diversifying your customer base, it is also good to have a diversified supplier base so you don’t have “all your eggs in one basket” and give suppliers too much leverage over your business.
Peter MacSwain, CPA
Peter.macswain@confederationgroup.ca
902.388.5409
