Managing The Key Value Drivers in Your Business

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When running the day to day operations of your business it can be difficult to find time to contemplate the value of your business. The value of your business is called “Enterprise Value” and yes, you can increase that value with proper planning. Many business owners I have interviewed after the sale of their business did not understand the value of their business before the sale or the key components effecting the business value. The owners lack of understanding in these areas negatively impacted the value of their business at sale despite how well the owner thought they managed and ran the business. As you get closer to that day when you start thinking about selling your business it is important to understand how these components can impact your business. You should also have a strategic plan focused on improving these components hence maximizing the “Enterprise Value” of your business.

Value Drivers and Exit Channels

The key components that make up the “Enterprise Value” of your business are called Value Drivers. These Value Drivers are broken into two segments; Internal and External Value Drivers. Combined, these drivers determine the Enterprise Value of your business and the the Exit Window. The question then becomes, who is going to buy my business? There are three types of buyers:

Exit Channels:

1. Strategic Buyer– Highest Value- Synergy Market Value
2. Financial Buyer– Second Highest Value- Financial Market Value
3. Related Buyer– Lowest of the Three Values- Asset Market Value

As shown each channel has a different transfer value and that value could be higher or lower than the Enterprise Value of your business. That it is why it is always good to know as an owner the type of buyer that is interested in your business.

Internal Value Drivers

There are nine Internal Value Drivers that impact the Enterprise Value of your Business. Each Value Driver may have more importance to a buyer meaning more value. The drivers shadowed in green are the ones extremely important to the success of your sale. One driver in particular can make your business unsaleable.

1. Size of Company– Where does your company size up in its industry? Will it be acquired to roll into a larger company or will it be a platform to roll up smaller companies into?
2. Locations– What markets is your business in and can it act as a demographic diversifyer or footprint into a new market for a buyer?
3. R&D– Does you company have a healthy pipeline of new innovative products that can compliment an existing product line of a buyer or act as a cross selling opportunity?
4. Management– Do you have a management team that runs the day to day and can continue to run the business after you sell?
5. Sales Force– Do you have a competent sales team with business plans and sales goals that are tied directly to driving revenue?
6. Growth Rate– Is your business growing or has it been flat for the past two years or more?
7. Employee Mix– Do you have a trained, talented and self motivated team that can continue to lift the business after you sell?
8. Operating Systems– This is a large investment for most buyers especially if they intend to roll your company into a larger company or if they plan to tuck in smaller companies into your business. If the operating system is not in place that talks to all aspects of your business with a dashboard and key KPI’s it can impact the value of your business.
9. Margins- Is your business effectively and efficiently ran? Do you have good margins verses other companies in your industry?

External Value Drivers

External Value Drivers help to determine where you are in the Private Market Cycle and how that can impact the price a buyer is willing to pay for your business. It is important to mention that the timing of the sale of your business is based on your needs and specific situation. With that said you should be aware of where you are in the cycle and how that can impact your Exit Window.

Is it A Good Time To Sell?

There are six External Value Drivers that help to define your Timing Window. The drivers shadowed in green show as favorable in the current Private Market Cycle.

1. Economy- Where is the economy and are we in a growth period, a recession or a flat market? Is there geo-political strife that can throw the country into a recession?
2. Market Demand– What is the current demand for your type of business and is there a strong demand from buyers?
3. Industry– Is your business industry demonstrating strong growth of revenues and interest from buyers? Is there disruption that is causing buyers to want to be in your industry?
4. Interest Rates– Are interest rates low enough where financing the debt in the deal still makes the purchase Accretive (Meaning does the purchase add value to the platform company)?
5. Timing– Where is the current Private Market Cycle? Look at the chart above and ask would you want sell your business in the Prime Selling Time or during the Deal Recession part of the cycle?
6. Competition– Is your company a company buyers want to own verses others in your industry? Is it a smarter purchase to buy your company verses your competitor?

As you can see there are a lot of factors that need to be thought out and prepared before you begin the process of selling your business. Working with a Certified Exit Planner can assist you with setting up a process and Action Plan focused on maximizing the Enterprise Value of your business while you manage the day to day operations of your business. A good Exit Plan can add another turn to the value of your business.

Here are a few questions to think about when evaluating your business and where you are in managing Internal Value Drivers.

1.Am I doing everything I can to maximize the value of my business today and into the future?

2.Is my business ready to sell?

3.How will waiting  or the Private Market Cycle effect the value of your business?

Give Your Business A Distinct Advantage

Contact us to discuss your preparedness plan: [email protected]

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