Revenue and profitability are generally good indicators of your company’s strength. However, when it comes to planning for a successful future, they are far from the only things that determine your company’s strength.
As you plan and perhaps approach your exit from your business, you may need to consider whether you have installed value drivers for your company. The presence of value drivers could enhance your ability to leave your business when you want, to whom you want, and for the money you need to succeed after your exit. The absence of these value drivers could impede your ability to achieve your goals.
What is a Value Driver?
A value driver is an aspect of your business that could potentially increase the value of your business to a buyer.
Your business is only worth what someone else is willing to pay for it. Generally, the easier the business is to run, the more valuable it is to a buyer, whether you sell to an outsider or an insider.
There are eight value drivers that tend to have a positive impact on company value when installed properly.
Value Driver 1: Next-Level Management
Next-level management is the most important value driver you can install in your business for several reasons.
- Next-level managers tend to be the people who run the business after you leave it.
- Next-level managers reduce your responsibilities within the business, which often means the business doesn’t need to rely on your presence to succeed. When the business doesn’t rely on you, it’s much easier for you to leave it on your terms.
- Next-level managers are likely going to be the people who install the remaining value drivers as you begin to plan for a successful future after your business.
Finding next-level managers can be challenging, but it’s not impossible. You may need to bring in people from the outside or you may have next-level managers within your company right now. As long as these managers have a proven track record of exceptional performance in terms of exceeding financial goals, they could come from just about anywhere.
Creating strategies to attract, properly compensate, and handcuff these managers is crucial. Your advisor team could play a pivotal role in helping you find, compensate, and keep next-level managers, which could support your overarching goal of leaving your business on your terms with financial security.
Value Driver 2: Operating Systems that Improve the Sustainability of Cash Flows
Sustainable cash flow is a key indicator of the strength of your business. One blind spot that business owners sometimes have is determining whether the businesses cash flow is sustainable without them.
For instance, you may have a business that runs like a Swiss watch when you’re at the helm. But you may feel as though you can never take a day off because without you, the business wouldn’t run well at all.
Having systems that allow your business to run well whether you are there or not is an attractive component to many buyers.
How these systems are constructed will likely be as unique as your business itself. However, determining what it takes to give your business the best chance to sustain its cash flow is an important value driver for your business.
Certain advisors may be able to help you identify gaps in your company’s systems. Once you’ve identified gaps, you can then take steps to find the right people to implement the right systems to encourage sustainable cash flow whether you are running the business or not.
Value Driver 3: Diversified Customer Base
Diversification is more than just a risk management strategy. Having a diverse customer base can help your company weather difficult times and reduce the likelihood that losing one major customer will harm the business.
There are several ways to diversify your customer base. You may consider offering products and services to a new market. Perhaps it’s a matter of properly marketing your current products and services to new audiences.
Regardless of the particular strategy, positioning your company so that it doesn’t rely on one or two major accounts should make your business more attractive to potential buyers, primarily because they don’t have to do the legwork of diversifying the customer base once they buy it.
Value Driver 4: Proven Growth Strategy
Many buyers of small and mid-sized businesses look for businesses that are already growing. To buyers, a turnkey business is much easier to integrate into their current operations than a business that needs a rehaul.
Once again, it’s important to determine whether your business’ growth is a function of your presence. If it is, and you leave, would the company stop growing?
Having a written road map for sustainable growth can help drive value to your business.
Value Driver 5: Recurring Revenue that Is Sustainable and Resistant to Commoditization
If you’re like most business owners, you likely believe that no one can do precisely what your business does. This confidence is essential to starting and growing your business. However, when planning for a successful future, it’s important to be objective about whether your products and services could be commoditized.
Market research may be one strategy to determine how your clients and prospects view your business. You may also discover that you need to adjust your products and services to avoid an impending commoditization of your products and services.
Addressing the needs of both the business and your clients could help you resist commoditization, helping your business stand out to potential buyers.
Value Driver 6: Good and Improving Cash Flow
The idea that growing companies tend to be more valuable may seem self-evident. But to reiterate, it’s important to know whether your improving cash flow is a function of your presence or of the business’ standalone strength without you.
Value Driver 7: Demonstrated Scalability
Similar to the above, showing that your business’ processes are scalable is an additional strength that may attract more buyers.
It’s not uncommon for business owners to reach a certain plateau in terms of the business’ scalability. For instance, you may have a business that’s a regional powerhouse, but you don’t have the resources, time, or desire to grow it any bigger.
There’s nothing wrong with this mindset. However, showing buyers that your business has the potential to continue to scale tends to make it more attractive to well-pursed buyers.
Value Driver 8: Competitive Advantage
A business that has a unique differentiator tends to stand out among the competition. If you can offer potential buyers a unique competitive advantage, it may increase the value of their business to them. This, in turn, could help you reach your financial security goal when you eventually sell your business.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional. Please feel free to contact us at your convenience.
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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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