There are a number of reasons to want to increase the value of your business, and knowing how is a question we often hear from our clients. What we also find, however, is a wide variety of definitions of ‘value’ amongst business owners, and what they mean when they say they want it increased. So, what does the value of a business really mean? How do you measure it? And what areas of value are truly important for the goals you want to achieve? Here’s how Maxim works with the idea of value, and how that can apply to the future growth of your business.
When we talk about increased value, the first thing we work to clarify is what your business is currently worth. Very often, that’s something business owners aren’t immediately able to answer, so a high level valuation is required. We take into account many factors, but the main two key areas we investigate are:
Sustainability of profitability
Business not reliant on key people
When measuring future maintainable profit for a business, we take a look at the earnings before interest and tax (EBIT), and see if you are achieving, and can continue to achieve profit after expenses. The greater the profit, the more you will gain as a return on your investment. For example, if you have a business that has $1,000,000 a year in profit, and you paid $2,000,000 for the business, in theory you have a 50% return. In two years, pre-tax, you are repaying your investment. The higher the multiple, the more secure and valuable the business should be.
When looking at company structure, the main focus is if there is too much reliance on key people. When talking about value, this is a significant factor. Why? Because your service or product needs to be what keeps customers and clients being acquired or sustained, not a single person (who could leave and take the clients and customers with them, or leave or retire and have those clients and customers seek another competitor). If one person or even client, is the value, then that devalues the overall business.
To increase sustainable profitability is to first improve and adjust your cost margin. This means, investigating:
your ability to source more affordable goods and services (without sacrificing the quality of your own product or service),
labour efficiency (this doesn’t mean downscaling your team, necessarily. By hiring and growing, you could be creating greater efficiencies and saving money in other areas because of it),
your overall spending habits and where you are overspending. A thorough audit and analysis of outgoing funds is the very first step to identifying opportunities to save, and so increase sustainable profits. (Remember though, sustainability is key. Don’t stop spending in areas that will negatively impact the ability for your business to run smoothly and effectively).
The best way to avoid the key person factor is to support a team being strong at their job, without exclusive reliance on one, or a small number, of people. This includes founders and CEOs. While it can be an inevitable byproduct of having marketed your business to be the ‘face’ of the business, it is still vital that your business can continue to function in your absence. This matters to you, even if leaving or stepping back, to make the business more valuable (sustainable) in the eyes of potential investors or buyers.
If your business is already facing ‘key person’ syndrome, there are a few ways to curb the impact this has on the value of your business:
Employment contracts that cite regulations around termination or resignation and acquiring clients
Tight client contracts
Improve the skills of other team members
Deepen the relationship between clients/customers and other team members
Have a tight, transferable onboarding and off-boarding process that can easily migrate when you acquire new staff
Improve efficiency and systems with technology solutions (to mitigate the need for manual personal knowledge)
Assess your current position with an independent appraisal, analyse financial performance and identify areas you can improve on and see it through. Maxim can support your critical assessment of the business with a SWOT (strengths, weaknesses, opportunities, and threats) analysis, and discover how it impacts your business and how to reroute your process to be more sustainable and, so, valuable.