In any business and M&A transaction, reaching for maximum valuation is one of the primary goals. Consistently improving the value of your business is crucial and satisfying for business owners in every stage of ownership– from those looking to sell soon to those who plan on keeping the business in the long term.
Why should business owners keep an eye on their valuation?
When considering selling their business, owners should put on a buyer hat and thoroughly evaluate the many factors that drive their business valuation and how they perform on each of those value drivers. This can help you determine a true-value price for your business before you officially go to market.
Outside of selling, such comprehensive business valuation exercise have other benefits. For example, prior to the transaction process, it can help identify enhancement opportunities to increase the business’ worth and things to do to improve the likeability factor to attract more buyers for your business. Further, such valuation exercise may also aid in raising capital for expansion or acquisition.
All in all, an ideal business valuation should demonstrate an accurate illustration of your company’s ability to grow, its past performance, and its intangible value.
How do M&A advisors value businesses?
Business valuation consists of a multitude of factors. A comprehensive valuation considers the qualitative, quantitative, internal, external, tangible, and intangible elements of your business. However, valuation can fluctuate based on your industry, the market conditions and trends, and more. Largely, at Persient, business valuation is considered in two parts: science and art.
The Science:
“The Science,” or about 65% of the value, represents the value offered by potential buyers based on cash flow or financial value. Financial Value is primarily determined using one of the standard approaches to valuation, including the Asset Approach, the Income Approach, or the Market Approach. Financial Value considers both historical financial performance and expected future performance. Oftentimes, the “Science” neglects intangible values of both the business and of working with an expert M&A firm.
The Art:
“The Art,” which expert M&A advisors bring to the table, can extract that additional 35% or so of value. Decision-makers at large multinational firms are not just looking for information or financials, as those rarely persuade them to act. The perception of how the information is presented or conveyed goes much further than the information itself. “The Art” recognizes the motivations and needs of buyers and, in turn, presents the business in a more compelling way through tailored positioning. Tailored positioning frames your unique and often hidden value drivers in a way that encourages internalization from the buyer. In other words, the buyer begins to focus on their needs instead of yours, which provides rationalization for paying a higher price. By combining intangibles (brand, culture, IP, market position, etc) and post-acquisition synergies (integration and diversification benefits), a tailored positioning of your business extracts additional hidden value in almost every transaction.
Few Ways to Increase Business Value
Increase operational efficiency and scalability
This significantly enhances the value of your business and should be a primary goal in your overall business strategy. Through operational efficiencies, streamlined processes, and a consistent team of talent, economies of scale would play a major role in your value increase. For example, with product and process specialization and efficient labor divisions, your business may bring down the cost per unit produced. By decreasing the cost per unit, your organization can increase production. In turn, this increased, most cost-efficient production improves margins, which can help owners allocate resources to supplement infrastructure and decrease overhead costs. Buyers are attracted to companies that demonstrate both operational efficiency and scalability.
Increase customer and supplier diversity:
If your business is dominated by one or two major customers or suppliers, you may be putting your business at risk of a lower value. Should one of those key relationships falter, revenues would plummet, supply chain may disrupt, affecting your appeal to buyers. With a diverse customer and supplier base, you mitigate the risk of dependency. If your customer base is limited, consider expanding geographically, across industries, or establishing additional streams of revenue.
Innovation:
It is immensely important for a company to keep up with technological and industrial innovation. In order to create future growth, make an impact on their market share, and meet ever-changing customer needs, you will need to take the necessary steps to ensure that your company remains innovative. A business that invests in its digital advancement and modernization can be worth significantly more. Investing in the right technologies, such as CRM software, CX automation, and automated billing and inventory systems, can help you create efficiency and cut costs. Further, proprietary software your company holds can also drive value. Finally, having a team on board that embraces technology and adapts to change is just as important as the technology itself.
Talent Retention & Culture
A business’s employees are its lifeblood. Their experience, relational capital, industry knowledge, training, and creative thinking abilities all drive value. Maintaining a strong, talented team requires a fervent dedication to a positive company culture that promotes healthy relationships, supports work-life balance, and capitalizes on team members’ strengths. Across the board, strong quality control teams, efficient back-office teams, and passionate customer relations teams can support growth (and the potential for growth) that a buyer may find appealing. Further, your leadership team in particular may come under the microscope of the buyer. Ensure that your leaders have a strong track record for growth and loyalty to your brand. It can also be a boost in value if there is a clear management succession plan in place.
Partner with Persient
After a lifetime of hard work and sacrifice, you deserve an M&A strategy that gets you the most value for your business. With our expert guidance, you will not leave anything on the table. We are committed to maximizing significant opportunities you hadn’t even considered.
At Persient, we have spent decades preparing business owners for success, helping them realize the full potential value for their companies. We look beyond simple prices and terms to skillfully execute deals that fulfill owners’ lifestyle, legacy, and monetary goals. Get in touch with us today and start leaving your legacy.
Investment banking services and securities offered through Independent Investment Bankers Corp., a registered broker-dealer, Member FINRA / SIPC. Persient LLC and Independent Investment Bankers Corp. are not affiliated entities. FINRA Broker Check.
