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Value Drivers for a Small Business
Hire more sales people. Spend more on advertising and promotions. Minimize operations and service. Sell more to existing customers. Central fire control.
As a small business owner, you have heard, considered, or taken some of the above steps to try to make your business more profitable. While these steps can have a positive impact on the bottom line, will they have a positive impact on your company’s business valuation? Will they increase the value of your company when you decide to sell your business? Let’s look at some of the key value factors that can influence the value of a business, above and beyond money.
Does your company have a unique recipe, one-of-a-kind formula, proprietary process, or other brand features that differentiate your products from its competition, thereby setting your company apart? How do you stand out from the noise in your business to stand out from the competition? A competitive small business that sells heavily to business customers must have at least one of the following characteristics compared to its competitors: speed, low cost, better quality. These attributes drive value and when positioned correctly, can positively affect the value of the business and the perceived value to the prospective customer.
Have you secured customers or partnerships that are loyal to you, without fear of competition? Such situations can significantly drive business value because you both eliminate competition and maintain a stable, predictable presence. A safe position is something that is very difficult to replicate. This may be a product or service you have developed that is beyond the reach of your competitors due to the cost, time, and resources required to ‘catch up’.
Has your company developed a special application, tool or technology as part of ongoing operations? Does it give you a competitive advantage? If so, this proprietary product or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not have to be patented to carry value but privacy and confidentiality must be maintained. It is important that non-competition and confidentiality agreements are strictly adhered to and enforced by the company, before and after the transfer of ownership. The benefits, uses and purpose of your proprietary technology should be explained to a business valuation consultant.
Strong Market Share
Is your company head and shoulders ahead of its immediate competition? Has your company made a plan to start buying the competition? If your company has been and continues to be a top leader in its market, the biggest value driver in business valuation is a large market share. In addition, you may not be a leader in your field, but if your brand recognition, service/product reliability and customer satisfaction are very high, this can be very attractive to a strategic buyer. This driver of goodwill must be adequately provided to the professional when driving business value.
Is your business successful because of repeat business, year after year? Do you have long-term contracts that exceed 12 months? The value driver in contract or service-based operations are loyal customers who often seek the company’s offerings because of their satisfaction levels and resulting brand loyalty. It is important that your business does not become too dependent on a small number of key customers where if they leave, your business will suffer greatly. A good rule of thumb is 25% of your revenue should not come from less than 5-10% of your customers. If the majority of your company’s revenues come from a few customers, a discount will be applied to the business valuation due to the lack of uncertainty and stability.
What is the average length of employment among your employees? A responsible business buyer will look for opportunities where current employees, especially management, will remain in place, following the exit of the current owner of the business. Having key employee contracts, competitive, but more importantly, loyal, dedicated employees who are committed to the success of the company regardless of the change of ownership will be more valuable to the prospective buyer and thus reflected in the valuation of the business.
Has your company found a way to become a low-cost producer of its products or services? Businesses that can bring their product to market below the market average can drive a price advantage. This can be achieved through key product relationships, link activities and financial commitments, special employee contracts, etc.
There are many value drivers that can be found in any small business and influence the value of the business; these should be investigated on a case-by-case basis, ideally with the help of a professional adviser. Carefully review your activities to uncover some of the hidden gems and unique benefits that your business can offer to future customers. While the key drivers will be reflected in your company’s past and future financial performance, some of these intangible assets can increase the customer’s perceived value of your business leading to a higher purchase price. You won’t reap the rewards overnight, but a systematic focus on how to increase your value through day-to-day activities will put you on the right path to higher financial rewards when you’re ready to sell your business.
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