Business Value — What is It and How to Increase It

Written by Darren Van Zyl
April 5, 2022
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Advisory, Business Value, Valuations

No matter where you are in your business journey, you want to have some idea of what your exit strategy could look like, and what your business value to potential buyers in the future is. 

Increasing the value of a business is often an integral part of the long-term business strategy for many owners. And as a business owner, you might already have a specific vision or plan laid out for your eventual exit and the sale of your business in the future. It’s important to plan ahead and understand the drivers to maximise your value so you have a higher probability of success when the time to sell arrives.

But placing a price tag on your business can be tricky, and you may be left wondering “What is the true value of my business?” If you’re a small business, most of your important and influential value-creating activities are yet to be implemented. This is often due to a miscomprehension of what true business value is and what value drivers actually matter to future buyers. What you think your true business value is may be different from what a buyer thinks. 

To effectively gauge your business value, you must understand what business value is and what the value drivers in your business are.

 What is business value?

You may think that the value of and in your business is directly correlated to your revenue. But your revenue growth is just one piece of the pie. Business valuation takes into consideration the total sum of all the tangible and intangible elements of your business. 

Tangible elements that influence business value include monetary values such as your revenue, equity, properties, and other assets. These tangible elements usually make the business easier to value.

Many businesses have almost no tangible assets beyond office equipment; however, their intangible assets may have significant value. Some examples are a well-respected brand, customer goodwill, intellectual property (such as patents or protected designs), and potential for growth.

How do I maximise my business value?

While business value may depend on a number of factors, maximising it lies in effective planning and strategies over a longer period of time. Here are some strategies smart owners do to maximise their value.

Reduce the “key man” risk

How can you avoid your business from relying too much on you? A business that is heavily reliant on the owner might project a future problem when potential buyers come knocking. Buyers need assurance that the business can run on its own even with a new owner. Unfortunately, many owners are running businesses that are not overly appealing to potential buyers because they are stuck in the owner’s trap.

Do customers come to you when something goes wrong? Does your business slow down when you are away? These are clear cut signs that the business is too reliant on you as the owner. And this negatively impacts the day-to-day operations, the value of your business, and its attractiveness to future buyers.

So, as an owner who wants to increase value, you must first work yourself out of the job. Identify those areas that you can remove yourself from. Focus on training your people so they can run the business even without you being so hands-on. 

It will take time to reduce key man risk, but the benefits can include improved performance, a more engaged team, and of course, less reliance on you. The most valuable businesses can thrive without their owners.

Establish an assembled workforce

A strong workforce is an intangible element of value that often gets overlooked. Buyers are now looking into your team in deciding whether or not to buy or making their own educated assessment of the value of your business. 

An assembled workforce that is invested in the business increases your value. It indicates how the operations can continue to roll even under the new management.

Devise a long-term business strategy with milestones

To make your business more attractive to potential buyers, you need to be able to demonstrate a clear road map for your business strategy. It is essential that you have a good understanding of where you’ve been and where you’re going. Aside from a continuously growing revenue stream, buyers would also like to look at the business’s future growth and what needs to be invested to achieve that growth. A long-term business plan and strategy help investors understand your business’s projected future.

Demonstrate your future free cash flow

Investors would like to know your business’s free cash flow now and in the future. Of course, it goes without saying that a buyer would ideally like to ensure that a business is stable and they would not need to invest an extra amount of money to help it grow. 

Your free cash flow refers to the amount of cash the business has after paying its bills and capital expenditures. Businesses with enough profit to invest into things they need to grow their revenue typically have a higher business value. You need to be able to demonstrate that your business is sustainable by showing how your business has grown cash flow and that it will continue to grow in the future. 

A negative free cash flow indicates a business’s inability to support its own operations. You need to get your business into a position where it generates enough profit to fund its own growth strategy into the future by effectively managing your cash flow.

Strengthen your brand’s niche or point of difference

Future buyers only buy what they could not easily create. A strong brand and differentiated market position place a great amount of value on your business. Assess your products or services and understand what their most valuable state is, and look for ways you can continuously innovate. What else can you introduce to make your products or services more competitive and attractive to the market? 

Develop a strategy for building your brand and improving your products and services, and ensure you have the right team and expertise to help you deliver upon your strategy.

 What is your business value?

Maximising your business value takes a lot of time and effort. There is no quick and easy fix that can happen overnight. It should be built on a solid strategy executed properly throughout your business journey. It’s good practice to start thinking about your plans sooner rather than later. But to effectively devise a sound strategy, you need to have a clear understanding of where you’re sitting now and what your projected future looks like.

If you would like to understand more about business value and the key drivers for increasing the value of your own business, get in touch with our Valuation specialists for a Financial Performance Analysis that helps you understand your current position and how you can maximise your business value by looking at the value drivers that matter.

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