Drivers of business value

Revisiting my previous blogs, I looked back at this one on drivers of business value, which was first published a few years ago. Most of the following, I have kept the same, but with interest rates increasing by 75 basis points to 3% on 3 November 2022 I though it worth updating.

More importantly the BoE warned on the same day of the longest recession since the First World War (although for it not to not be as deep as the downturn that followed the financial crisis of 2008). It is essential that business owners who are considering an exit in the next few years have the fundamental drivers of value in good order.

Will there still be buyers if you would like to sell your company? Quite simply, yes there will, because growth is by far the best method to grow quickly if an acquirer’s core business is sound.

Moreover, there are still substantial funds held in Private Equity ready for investment in the right companies: that said PE investors will look to make larger investments, so a company with EBITDA^(*) of less than £1m is unlikely to attract PE investment. Private Equity also like senior management team to stay largely in place to ensure the business plan is delivered and they get to realise their investment in say 5 years’ time.

So, what are the drivers of value?
It is hard to distil to just a couple of points, but is essentially what does your business look like now, in the eyes of a potential buyer, and what will it look like in 3, 4, 5 years’ time?

Currently:
This may include having a strong management team that is not reliant upon its owners.

Customers are likely to be recurring and have been with you for a number of years. Importantly, customer concentration will be low: if your biggest customer accounts for more than say 10% of total annual sales, a buyer might consider there to be a risk of reduced future profits if that customer were to be lost.

A good team & loyal customers, will together with the reputation you have built up over a number of years add value. Together they will have helped you create a positive and reliable trend in sales but more importantly profit.

Prospects:
Will include having a good business plan supported wherever possible (since this will not apply to all businesses) a strong order book. If your business is not based on projects, then having recurring sound customers as described above is essential. The profit trends above will be supported by forecasts that show how profits will continue to grow in the future.

The industry/sector you are in is also important. You will know, better than I, if there have been competitors of yours bought by bigger ones. If that is the case then with the above points in place, what is going on in your sector might have a bearing on what value you will receive.
 
But timing is generally out of your control - you may just hit lucky in marketing your company at the same time that a buyer is looking to acquire. But some aspects of timing are within your control. For example, it isn’t usually a good idea, to market the business for sale during the summer holidays or over the Christmas period – people just aren’t there to see it, and if they are, their mind may be elsewhere and so the marketing effort could be wasted.

Linked to timing is the industry that you are in: operating in a ‘nice’ industry. There is not a lot you can do about the sector you are in, but if you foresee developments that you do not like, you could choose to exit in advance of those developments happening or consider how you can reposition your business to protect against them.

A buyer might have a strong strategic reason to acquire you, which might be to get into your geographical area or to steal a march on a competitor: In such cases we have seen some buyers offer double what the second closest bidder offered. A lot of this is luck.

At the tail end of the year…and I dread to mention, just 6 weeks to Christmas, it is time to reflect on how you see your business, and your involvement with it. If you would like to discuss the value of your company, or what can be done to increase its profits and value please get in touch.