CRAIG ALEXANDER RATTRAY says there are eight key drivers determining value
Twice last week I was asked ‘how do I increase the value of my company’? Fortunately, I have significant experience of working with SME companies over many years through my training to become a chartered accountant with Arthur Andersen, followed by six years investing in such companies in venture capital and private equity roles, before working in industry and other advisory roles, before working for myself since 2009.
The work I do focuses on improving profitability, cash flow and shareholder value for clients so I feel qualified to comment and advise on this important area.
As well as my financial management and finance raising experience, I became a Certified Value Builder during the last year, and have been a trusted advisor to entrepreneurs seeking to grow their business for many years.
The Value Builder System is a scientific methodology proven to increase the value of a business and has been successfully implemented in over 60,000 businesses worldwide. My company, Excolo33 uses the Value Builder System, and works with entrepreneurial business owners with the vision and drive to grow their company, and helps develop and implement effective growth and exit strategies, building value and providing freedom in terms of time, stress and money. This can be done on a one-to-one basis or through MasterMind groups.
When starting the process, I like to think of the end goal or destination and work back.
What is the anticipated exit timescale and what is the value aspiration?
Who is the likely acquirer of the business?
What is an acquirer looking for?
What is important to the acquirer?
That shapes the decisions and the things to focus on, and allows the key areas to be tackled in an order of importance.
Many people think that the way to increase company value is to solely focus on increasing profits.
Whilst profitability and cashflow are always key factors, in many situations there can be other factors that I believe are more important in the mind of the acquirer – think Intellectual Property and protected market positions. A large multinational company can take significant advantage of such strengths as it is likely to have the resources and distribution network to maximise this.
Similarly, a company with a well-rounded management team that operates independently of its owner is generally valued higher as it can be easily integrated or run by a new owner without a handover period to transfer knowledge, experience and contacts from the owner’s “head”.
A business that generates regular revenue from loyal and consistent customers, whilst simultaneously growing, can similarly command a premium price and this is a great way to build future maintainable earnings and shareholder value.
There will always be many opinions on the key drivers of value. I believe there are eight:
1 Financial Performance – the trading performance of the company over a period of years and the quality of its internal financial management systems. A consistent track record of growth and profitability will always enhance value. However, it is only one part of the overall valuation jigsaw.
2 Management Team – a business that runs operationally without its owner is worth more than one that relies on the owner to make all key decisions, and interact with customers and suppliers. It is also significantly easier to scale a business with an experienced and dynamic management team.
3 Intellectual Property / Monopoly Control – how well is the company’s products or services protected from its competitors by providing something that is unique and that others do not have. The ability to eliminate or restrict competition has a major influence over company value. I can think of businesses that were loss making that had a portfolio of patents that were sold for substantial sums to multinational companies that paid a significant premium due to the strategic value of the company, and then made huge sums using their reach, resources and market position to maximise the competitive advantage. They were prepared to pay much more than the profit being generated as they knew the business was worth much more under their ownership.
4 Growth Potential – the future growth rate will always have an impact. A company that operates in a growing market will generally be worth more than a company operating in a declining market.
5 Recurring Revenue – a regular and consistent stream of revenue form ongoing customers who pay weekly, monthly or annually increases company value. Many businesses believe that it does not apply to them, but I can guarantee that any business should be able to find one of the six types of recurring revenue and nine subscription models that they can implement in their business.
6 Dependencies – how dependent is the company on any employee, customer or supplier. We have all seen companies where they have one customer that equates to 80% of turnover or is reliant on one key supplier. If something happens to the key customer or supplier, the valuation of the business falls significantly, and indeed can be eliminated entirely.
7 Cash and Working Capital – does the business generate cash or does it consume cash. Is ongoing capital expenditure required or other cash out flows to keep it growing. Ideally, we want our company to be profitable and cash generative. Remember that any acquirer must fund the purchase price and the working capital requirement – effectively two payments from the same pot – if the working capital element can be reduced and enhanced purchase price can be argued.
8 Customer Satisfaction and Recommendations – don’t forget about the customer. A company with a loyal customer base that makes repeat purchases and stays for many years is very valuable. The Net Promoter Score developed by Fred Reichheld is a great way to monitor and manage this. Regular interaction, surveys and discussions let the owner know how happy customers are and how likely they are to recommend to others and to repurchase.
A key point to remember is that there are no rules with respect to how a company is valued. Ask three people and you will probably receive six answers and a wide range. It depends on the assumptions used and the opinion of the valuer.
The only true measure is when the company is sold.
However, by doing some of the things highlighted above, I can guarantee that the value of your company will increase.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays