According to Google’s Keyword Planner, on average 10,000 monthly searches are conducted on the term business valuation alone. Being prepared with your best business valuation allows you to maximise your returns as well as minimise your risks. By considering value drivers, sellers will be able to position the company favourably to show good cash flow and reduce apparent risk; while buyers know which metrics to keep an eye on. Key value drivers are the factors that increase the value of a business in the event of a sale opportunity. You should be familiar of key drivers during business valuation.
Financial Metrics
A business’s financials are an essential part of the valuation. The better the quality of the financials, the cleaner those financials, the higher the value of that business because it becomes easier to get that business financed if you need to get a loan.
Example questions to ask pertaining to these metrics include:
What is the quality of the financials like?
How clean are the financials?
Are these financials a true reflection of operations?
Does the business have debt?
Does the balance sheet add up?
Is inventory flow represented honestly?
Unclear, inconsistent, and incongruous financials drive down the value of a business.
Recurring Revenues
When companies have recurring revenue, it drives up the value of a business because there revenue consistency. You can rely on those revenues coming in monthly. Without consistent business, a company will soon run aground. Does the company you are interested in have loyal customers? Regular clients? Or retainers? These questions and the volume of monthly revenue must be known in order to ascertain just how much work you will need to put in to keep the business running. The more work you will have to do to secure new clients, the lower the value of the business.
Owner Involvement Level
The risk increases when you take over a business that the owner was so involved in. Businesses that revolve around the owner are exceedingly difficult to take over. It is not uncommon to find that most small businesses were founded on the personality and strengths of the owner. This can make operating difficult as, without the owner, the culture and essence may shift the business’ dynamics. If on the other hand, there is minimal owner involvement it makes the transition smoother and improves business valuation.
Employee Quality
Questions to ask to understand the role of employees in the company include:
What is the culture like?
The turnover rate?
Are there any employees who if they left, their absence would cripple operations?
Have the employees signed non-solicitation clauses?
How autonomous are the employees?
Having an exceptional employee base is great and can certainly reflect favourably on the value of the business, but employees should not become liabilities.
Barriers to Entry
How easy is it for others to set up shop in the industry the business you wish to purchase operates in?
Is there any technical knowledge that makes it an exclusive niche?
Who are the main competitors and the industry’s dominant players?
Knowing this piece of information is key in evaluating the competitor’s risk. When the barrier to entry is high, the business merits a little bit more consideration when it comes to value. The more specific the niche, the higher the barrier to entry, the better the valuation.
Business Systems
Does the business have clearly defined business systems and processes in place?
Well-defined company practices make the transition easier and demonstrate the level of care, thought, precision, and foresight the owner has. It should give you confidence. And consequently, the clearer the systems the higher the value of the business. Infrastructure matters and documented policies and procedures will determine whether you are decreasing or increasing value.
Is your business ready to get the best valuation?
These are six key value drivers you should be considering when analysing offers and during business valuation. Mergers and acquisitions are complex. Fortunately, you do not have to navigate the buyer/seller process alone. Scott Ker is an experienced M&A business broker advisor that can assist you in evaluating offers and further understanding value drivers. Contact Scott Ker today to book an obligation-free 30-minute appointment to explore your best options for sale, growth, or succession. Appointments can be made during or outside business hours, at your preferred location, and face to face, phone or online.