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Do you know how much your business is worth and whether or not it is increasing in value.  If your business is not increasing in value, then you are destroying value.

Here are 9 tips to assist you in determining whether or not your business is likely to increase in value his year.

1) Profits

Regardless of which mainstream valuation methodology you use (capitalisation of earnings or discounted cashflow) the level of profits is one of the major drivers of business value.  Are your levels of profits increasing, static or declining?  What has been the longer term trend on profitability?

2) Customer base

What is happening to your customer base, is it expanding or contracting?  Are some customers getting much larger, which may lead to profit pressures or increased customer concentration risk?  Are your customers making reasonable profits or are they under financial pressure?  If your customers are buying less frequently is it due to their business being slow or them using alternative suppliers.  How is the quality of your products/services?

Business value is maximised when you have a spread of repeat customers, who are solid financially.

3) Employees

Recruiting and training staff requires a considerable investment.  How stable is your workforce and is there adequate depth of quality staff available?  Is the staff turnover rate increasing, if so why – conditions, working environment, remuneration and/or management?

4) Systems and documentation

Broadly there are three types of goodwill: 1) location goodwill, 2) personal goodwill and 3) business goodwill.  The location goodwill usually resides in the owner of the premises, personal goodwill is the value that it attributed to the owner and cannot be transferred to others (such as a celebrity chef or brain surgeon).  The highest value is attributed to business goodwill, being customer base, suppliers and systems that are not dependant on the owner.

How systematised is your business or does it all revolve around you.  The more reliant the business is on you, the less valuable it probably is.  What are you doing to make the business more robust?  How are your processes documented and what about training and delegation.

Is your business housekeeping in order, such as financial accounts/income tax returns accurate and up to date, material agreements signed and a reasonable property lease in place?

5) The competitive environment

Is your overall industry increasing or contracting?  Are the new larger competitors or substitutes on the horizon?  How is the power shift changing in your industry and are you becoming more or less powerful, because power increase usually means a business value increase and via versa.

6) Your working capital and funding base

Profits are part of the business valuation equation, with another important component being how much money you have tied up in the business to generate the profits.  Has your level of working capital (inventory plus receivables less trade creditors) increased?  I have seen trends in some industries where the levels of profits are increasing at an adequate rate, however customers and suppliers are being much more demanding on the business to fund working capital in the supply chain, resulting in a decline in return on funds invested.

Have you cleaned out slow and obsolete inventory items or are you kidding yourself on their realisation value?

7) Government policy

Many industries are influenced by Government policy.  Have there been any material changes in Government policy, or planned changes in policy, that may impact your business?  Government policy may have a positive or negative impact on business value including from regulations, licences, taxation and incentives.

8) The economy

Business values are also impacted by the local and international economy by issues such as exchange rates, interest rates, consumer sentiment as well as the cost and availability of finance.  What impact will the broader economy have on the value of your business this year?

9) You

For many smaller and medium sized businesses, the business value is inextricably linked to the owner.  How is your passion and energy for the business?  How is your health?  What are you doing to develop the next level of management and a successor?  What is your horizon and what are your plans for an exit?

As each of these 9 areas may impact the value of your business, please take a critical look its position and prospects.  What are you going to do this year to make your business a more valuable asset?

It can be lonely as the business owner, so don’t do it all yourself.  Surround yourself with experienced and professional advisers who have your long term interest at heart.

 

Peter Wallace

Endeavour Capital

Sydney

 

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