Eight key drivers to building value in a business
Are you fit for sale? Eight things to get right in your business to make it ready for sale.
Having survived the downturn we are all a bit wiser. Unfortunately, we are also a bit older so making the right decisions has never been more important.
There has never been a better time to get your business in shape and ready for sale. If you’ve had to make some hard cost decisions over past few years then no doubt you are a fitter and leaner business now than you were. You are now ready to get the most from your business – making some key decisions now will enable you have the opportunity to exit from your business and realise the value that you have worked so hard to create.
Over the years we have worked with many owners looking to sell their business. Many wait until it’s too late and the business has already lost some value. Many miss the opportunity by not focussing on the key elements that continuously create and drive business value.
Drawing on our own experience and research from analysing over 20,000 business sales, there are eight key drivers of building business value that you should focus on. These are:
1. Growth prospects
If your business has the ability to grow quickly then you are achieving one of the true value creators.
Better still if your potential buyer sees an opportunity to scale your business more quickly and effectively than you then there is an immediate value add for everyone. Avoca was sold to Aramark because it had a business proposition that the buyer believed they could expand internationally.
2. Financial performance
Businesses that have higher margins that their competitors are attractive to buyers. This enhanced margin reflects either more efficient processes, a willingness of buyers to pay for a premium product or a dominant market share. Online retailers are particularly strong on this value driver through a lower cost model than traditional bricks and mortar businesses. Convenience for the customer leading to loyalty and repeat, habitual purchase – plus add in a lower cost model and you have a winning formula according to Amazon!
3. Recurring revenues
The less risk in a business, the greater the sale price. Imagine having a hundred thousand customers all paying €9.99 subscription every month. My favourite is the Dollar Shave Club. For a small price they will deliver to your door all your shaving needs. Equally think of Netflix, online newspapers or your cloud accounting service provider. Once you sign up their cost of service for each new customer is very small.
4. Market control
Whilst you might dream of having a monopoly it rarely happens and rarely lasts. However, you may have a degree of control in your territory – either through market size, a brand USP, distribution, or other barriers to entry. Domestic waste disposal companies are a good example of this. Once they achieve a certain scale in even relatively small territories it is difficult for a new entrant to gain sufficient market share without incurring significant costs. Far easier for a competitor to acquire them than enter into a long battle.
5. Customer satisfaction
There is much written these days on companies looking to improve their customer experience. This has become a key differentiator and is the core value of the Virgin group of companies. Virgin regularly achieve superior margins through customer loyalty, superior customer experience and referrals or customer recommendations.
6. Independence from owner
The job of a business owner is to remove themselves as quickly as possible from the day-to-day operations of the business. As Richard Branson put it at the recent Pendulum Summit in Dublin, a business owners job is to ‘put themselves out of business’. Why? Because you will not be around when the new buyer wants to take over. If you are the main holder of expertise, customer relationships, service delivery then you are the business. Without you there may not be anything to sell.
At one time Ryanair was totally dependent on Michael O’Leary for its innovation and drive. However, building strong management teams is the key to long term success and Ryanair have now achieved this. Equally, large companies have found it challenging to transition where there is a dominant person or family, Independent Newspapers would be a good example.
7. Independence from key customers, suppliers or employees
At stages in a company development you may have an over reliance on a customer, supplier or key employee. This is not unusual. However, you must actively work to remove this risk. The simple example is a football club that is over dependent on its star striker. When Suarez left Liverpool it didn’t take long for Brendan Rogers to follow through the exit door.
8. Working capital management
The easiest way to take cash out of your pocket and put it in the buyers is to mismanage your working capital. Valuable businesses are ones that can generate cash and require less cash to fund operations. A buyer will typically pay the agreed price on a ‘debt free, cash free’ basis. So if you have short term borrowings to finance poor credit terms then that debt will be taken off the agreed purchase price. A straight loss of cash in your pocket. Equally a buyer will see an opportunity to change the credit terms post purchase and use this freed up cash to reduce their investment. Free money for them.
Our Business Value Builder process is designed to work on these eight areas in your business. Time and again we see businesses that leave it too late to get their business ready fight fit and ready for sale and leave money on the table.
To find out more about how we can help you drive up the value of your business and achieve your personal and business goals, contact Gerard O’Reilly, partner and Business Value Builder programme lead.
There has never been a better time to get your business in shape and ready for sale. If you’ve had to make some hard cost decisions over past few years then no doubt you are a fitter and leaner business now than you were. You are now ready to get the most from your business – making some key decisions now will enable you have the opportunity to exit from your business and realise the value that you have worked so hard to create.
Over the years we have worked with many owners looking to sell their business. Many wait until it’s too late and the business has already lost some value. Many miss the opportunity by not focussing on the key elements that continuously create and drive business value.
Drawing on our own experience and research from analysing over 20,000 business sales, there are eight key drivers of building business value that you should focus on. These are:
1. Growth prospects
If your business has the ability to grow quickly then you are achieving one of the true value creators.
Better still if your potential buyer sees an opportunity to scale your business more quickly and effectively than you then there is an immediate value add for everyone. Avoca was sold to Aramark because it had a business proposition that the buyer believed they could expand internationally.
2. Financial performance
Businesses that have higher margins that their competitors are attractive to buyers. This enhanced margin reflects either more efficient processes, a willingness of buyers to pay for a premium product or a dominant market share. Online retailers are particularly strong on this value driver through a lower cost model than traditional bricks and mortar businesses. Convenience for the customer leading to loyalty and repeat, habitual purchase – plus add in a lower cost model and you have a winning formula according to Amazon!
3. Recurring revenues
The less risk in a business, the greater the sale price. Imagine having a hundred thousand customers all paying €9.99 subscription every month. My favourite is the Dollar Shave Club. For a small price they will deliver to your door all your shaving needs. Equally think of Netflix, online newspapers or your cloud accounting service provider. Once you sign up their cost of service for each new customer is very small.
4. Market control
Whilst you might dream of having a monopoly it rarely happens and rarely lasts. However, you may have a degree of control in your territory – either through market size, a brand USP, distribution, or other barriers to entry. Domestic waste disposal companies are a good example of this. Once they achieve a certain scale in even relatively small territories it is difficult for a new entrant to gain sufficient market share without incurring significant costs. Far easier for a competitor to acquire them than enter into a long battle.
5. Customer satisfaction
There is much written these days on companies looking to improve their customer experience. This has become a key differentiator and is the core value of the Virgin group of companies. Virgin regularly achieve superior margins through customer loyalty, superior customer experience and referrals or customer recommendations.
6. Independence from owner
The job of a business owner is to remove themselves as quickly as possible from the day-to-day operations of the business. As Richard Branson put it at the recent Pendulum Summit in Dublin, a business owners job is to ‘put themselves out of business’. Why? Because you will not be around when the new buyer wants to take over. If you are the main holder of expertise, customer relationships, service delivery then you are the business. Without you there may not be anything to sell.
At one time Ryanair was totally dependent on Michael O’Leary for its innovation and drive. However, building strong management teams is the key to long term success and Ryanair have now achieved this. Equally, large companies have found it challenging to transition where there is a dominant person or family, Independent Newspapers would be a good example.
7. Independence from key customers, suppliers or employees
At stages in a company development you may have an over reliance on a customer, supplier or key employee. This is not unusual. However, you must actively work to remove this risk. The simple example is a football club that is over dependent on its star striker. When Suarez left Liverpool it didn’t take long for Brendan Rogers to follow through the exit door.
8. Working capital management
The easiest way to take cash out of your pocket and put it in the buyers is to mismanage your working capital. Valuable businesses are ones that can generate cash and require less cash to fund operations. A buyer will typically pay the agreed price on a ‘debt free, cash free’ basis. So if you have short term borrowings to finance poor credit terms then that debt will be taken off the agreed purchase price. A straight loss of cash in your pocket. Equally a buyer will see an opportunity to change the credit terms post purchase and use this freed up cash to reduce their investment. Free money for them.
Our Business Value Builder process is designed to work on these eight areas in your business. Time and again we see businesses that leave it too late to get their business ready fight fit and ready for sale and leave money on the table.
To find out more about how we can help you drive up the value of your business and achieve your personal and business goals, contact Gerard O’Reilly, partner and Business Value Builder programme lead.
