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What’s Driving the Value of Your Business?


Trevor Hood on May 12, 2010 in Advice for Business Owners

Given the current economic climate, we find that most business owners are taking this opportunity to really focus on their operations. In part, this focus is attributed to ensuring their continued success in a period of uncertainty but business owners also want to be well-positioned for when the economy turns around. From a longer term perspective, this is also a great opportunity to examine ways to further build or enhance the value of your business so that, if or when the right opportunity presents itself, you can maximize the proceeds on the eventual sale.
In order to build value within a business, business owners first need to understand the “value drivers” for their particular business. Value drivers are characteristics or factors or a business that impact the price that a potential buyer would be willing to pay for the business and while there are some common themes each business and their respective value drivers can be different. For example, physical location has a much larger impact on the value of a retail business as compared to that of manufacturing business.

So how do you build the value of your business? Some considerations include: Understand your starting position: It’s virtually impossible to build on something unless you understand your foundation or starting point. While a formal business valuation would be helpful, simply taking the time to examine the strengths and weaknesses of your business from the perspective of a potential purchaser will go along way in evaluating your starting position.

Increased cash flow or reduced risk: In general, increased business value is the result of increased cash flow (profits), reduced business risk or some combination of the two. However, increased cash flow will not necessarily increase value in situations where business risk is so high that there is no goodwill value in the business (i.e. business has only one customer or could not operate without the business owner). In such situations, only reduced business risk will potentially lead to enhanced value.

Controllable vs. Uncontrollable Value Drivers: Not all value drivers are within your control as evidenced by the fact that the current economy has significantly impacted business valuations but most of us have little ability to impact the global economic meltdown. Thus, it is important to separate what you can control and what you can’t control before you start to focus on making changes to impact those value drivers. And, even with uncontrollable value drivers, consideration should still be given to mitigating any potential risks (i.e. employee cross-training or key man insurance for business owners or critical employees)

With each of the above considerations, you and your business are not only going to benefit today but down the road when you are ready to sell your business and drive off into the sunset.