Recently we hosted business leaders from across Melbourne to discuss the topic of building business value.

Whether you plan to keep the business or eventually exit, it’s simply good business to take an approach of continuously building value.

A business built with value in mind ensures you are ‘exit ready’, provides flexibility for the owners and maximises the value at which you can sell. And after all, all owners will exit one way or another. It’s important to distinguish between a ‘financial valuation’ and a 'strategic valuation'. A financial valuation is based on financial statements, often using industry-standard earnings multiples. With a strategic valuation, specific buyers will value elements of the business far beyond than the financials. You might have overcome a key industry constraint, have very hard to replicate systems or have an enviable customer list.

We introduced a set of ‘value drivers’, that business owners can focus on to create strategic value in their business. In this article, we’ll summarise eight key business value drivers.

1. The Entrepreneur is Redundant

Value is very quickly eroded when the business is reliant on the day-to-day involvement of the owners. Imagine buying a business and then finding out that it simply won’t function without the know-how or 80-hour working weeks of the owner.  Certainly the business would be in trouble if they should leave or become unavailable. But there is also a significant investment required to reduce this key person risk.

When the owner has established effective systems, built a team and can delegate with confidence, you have a far more valuable business. Plus the owner is free to focus on exploring strategic opportunities and recruiting top talent.

2. Regular Strategic Planning

Strategic planning cops a bad rap. And that’s because it is often done poorly.

First, there’s really two parts to the process – the strategic thinking element that results in a company’s strategy: How will we win?

And then there’s the execution planning element: What are we going to do and when to execute our strategy?

Planning has to be done regularly and consistently. There’s no problem with setting long-term goals and a vision for the business. But if you’re not reviewing the plan regularly, then you won't be responding to changes in the marketplace. Examples are technologies, trends, competition, market dynamics and evolving customer needs. Lifting your head up out of the day-to-day is vital if you're going to keep up. Nor does it help to make up the process as you go. Consider the confidence and value that’s generated by a strategic planning process that runs like clockwork.

3. Customer Concentration

Consider two near identical companies. Company A earns 40% of its revenue from one customer. Company B’s largest customer only accounts for 5% of its revenue. Which company would you rather buy?

Relying too heavily on a single customer or a few major customers leaves a business highly vulnerable if those customers leave. Sometimes all it takes is a simple personnel change or a client testing the market to see if better pricing is out there. A diversified customer portfolio provides stability and de-risks the business. It also demonstrates that you have a repeatable process to generate business.

4. Recurring or Predictable Revenue

Again, let’s consider two near identical companies with the same revenue and profit. Company A earns its revenue through project work that lands at the mercy of client’s budget cycle. Company B earns recurring revenue throughout the year with a high rate of retention. Again, which business would you rather buy? The business with revenue all over the map or the one with a nice, smooth predictable revenue curve?

Examples include subscription services, maintenance contracts or simply regular repeat purchases. If your revenue streams are predictable, it provides a great deal of confidence and value to a buyer. It’s often said that predictability is the #1 driver of value - it drives down risk.

5. Systems & Processes

“This is how we do it here.”

There are business that have repeatable, predictable systems and processes that run smoothly. Then there are others where the team is constantly scrambling, hair on fire, making things up as they go.

Routine sets you free.

When the team has established systems to follow, it fosters a culture of operational excellence and allows the business to scale. How much faster can you train a new staff member and have them working at full productivity when there’s a system to follow?

6. Key Metrics

Setting and tracking clear goals and measures of success demonstrates that a business knows where it’s going, how to get there and is on track.

Consider the Revenue target that you have in your annual budget. Is it just a number plucked out of the air, or do you know exactly how many meetings, leads and customer touchpoints are required each week to hit the target?

The impact of everyone on your team understanding whether we’re winning or losing, whether we’re on track and achieving our goals, is enormous. How would your business be different if everyone could objectively answer 'yes' to the question: ‘Have I had a good week?’

7. Profitability/Gross Margin

Of course, a growing profit is a fundamental driver of business value. However, buyers will often obsess about gross margin as a percentage of revenue. Why?

Growing gross margins demonstrate an effective business strategy. Your ideal customers have been clearly identified, are growing in number and you’re efficiently meeting their needs. You’re not having your margin eroded by pricing pressure or unsustainably slashing costs.

Consider the impression made on a buyer with a consistently growing gross margin. It signals that as the company grows the margins will get better. Now that’s valuable.

8. Visibility

Imagine going to a football match, but there’s no scoreboard. Which team is winning?

Yet in business we see this happen all the time. The scoreboard can only be seen by a select few members of the leadership team. Even then, often they’re often looking at the result rather than the measures that drive the intended result.

Transparency and a sense of ownership is created by sharing key performance indicators. Give employees visibility of goals and progress, and they'll better understand how they can contribute.

You want your strategic plan, goals and KPIs up on the walls (physically or virtually) and visible to all.  After all, there’s a lot of truth to the saying “out of sight, out of mind”.

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By focusing on the drivers of business value, owners can realise the potential of a business that doesn’t depend on them. They’ll also remain "exit ready," providing flexibility and opportunities well into the future. None of this is about ‘being corporate’ or ‘looking like a big business’, it’s about doing what’s necessary to build a valuable asset.

To learn more about what our expert business advisors can do for you and your business, get in touch with us today!