Value drivers are characteristics of a business that either reduce the risk associated with owning the business or enhance the prospect that the business will grow significantly in the future. An improvement in the performance of the value drivers can significantly increase the value of the company and facilitate the sale at a highest range of the multipliers of its industry
Here is a brief summary of the most common value drivers:
Value Driver #1: Stable and Predictable Cash Flow
In general, the level of income and cash flow generated by a company is the number one attration to a potential buyer. The value associated with acquiring the available cash flow of a company is directly related to the risk of losing that cash flow in a transfer of ownership, the lower risk the higher the price will be to acquire it.
Value Driver #2: Reliable Financial Information
Reliable financial information is not only a critical element of business management,but also serves as a basis for demonstrating that a business is consistently profitable. The lack of financial integrity is one of the most common obstacles encountered during the sale process and could be a deal breaker because an in-depth analysis of the asset being negotiated is not possible.
Value Driver #3: Customer Diversity
A broad customer base in which no single client accounts for more than five to ten percent of total sales helps to insulate a company from the loss of any single customer. It reduces the risk of serious cash flow issues if one or more customers do not stay under new ownership.
Value Driver #4: Human Capital / Quality of Workforce
Buyers look for situations where management and / or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge, is also considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. This reduction of risk will pay off with increased purchase price.
Value Driver #5: Growth Potential
When an owner can describe realistic opportunities for growth that specifically illustrate the reasons why cash flow and the business itself will grow after it is acquired, a higher value can be achieved. A documented growth plan demonstrates the viability of the company’s future and may identify opportunities that a buyer had not considered.
Value Driver #6: Operating Systems and Procedures
The establishment and documentation of standard business procedures and systems demonstrate that the business can be maintained profitably after the sale. Business systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, as well as the methods used to track how customers are identified and how products or services are delivered.
Value Driver #7: Facility and Equipment Condition
The business facilities and equipment should be well maintained to realize maximum value. Buyers will appreciate that their investment will not include major repairs and that all equipment and inventory will be easy to locate and identify. Lastly, are the facilities large enough and machinery sufficient to accommodate some level of modest sales growth? A buyer does not want to have to look for additional space or immediately invest in new equipment shortly after closing.
Value Driver #8: Goodwill
This value driver involves stability and consistency. Name recognition, customer awareness, history, ongoing operations, and reputation are all part of business goodwill and influence value. This driver of goodwill should not be overlooked in a valuation because it is helps mitigate perceived risk.
Value Driver #9: Barriers to Competitive Entry
Features that give a business an advantage over its competitors strengthen its strategic position, or that can be leveraged for future gain boost value and lessen perceived risk. Buyers will pay a premium for a niche that has barriers to competitive entry.
Value Driver #10: Product Diversity
Diversity of revenue sources lowers the inherent risk of the business. Therefore, businesses with a healthy product mix, good gross profit diversification, or with products or services sold into multiple industries, receive a higher perceived value from prospective buyers.
A business valuation is about the company’s transferable value. It is useful to value your company through the eyes of a buyer. To do so you should pay attention to the value drivers of your company.
How do you manage the value drivers of your business?
This post is based on the Rose Stabler post published on www.divestopedia.com on March 15, 2017.