Xentum | What factors increase the value of a business?

What factors increase the value of a business?

February 24, 2021 - 3 minutes read

Posted by Xentum

If a key part of your personal financial plan is to build a business to sell as an asset further down the line, you’ll want to know how to make it worth the amount you need to make the sale worthwhile.

How valuable your business needs to be will depend on the goals in your personal financial plan. Your plan will also inform when and how you sell this business. All this and more is worked through as part of our WealthPlan™ financial planning process. Crucially, we help you work out your ‘big number’ – the value your business needs to achieve – which will allow you to live as you wish beyond the sale.

As well as understanding your ‘big number’, you need to be clear on what potential buyers will look for so that you can work towards creating a saleable business as early as possible.

 

It’s all about demand

Put simply, what makes a business valuable is how much demand is generated from the number of buyers and investors – the more the better, of course. Among the many factors such as expertise, profits, customers and technology that will all influence demand, it’s important to understand what your key driver is because this is an essential element of the sale planning phase.

With our help, you’ll need to think about:

  • Who are you going to sell your business to?
  • Why would they want to buy it?
  • What might put off potential buyers?

When it comes to selling your business, the earlier you start planning the exit process the better. Whether you plan to sell this year or in 10 years, you should run the company with the sale in mind.

What adds value to a business?

It’s easy to over-estimate the value of your business, especially when you’ve put in years of hard work. You’ll need to take a step back and assess the various factors which would be
taken into consideration by potential buyers, including:

  • Scale (revenue or profit)
  • Potential to scale
  • Abundance of repeat revenue
  • Technological or employee expertise
  • Strong management
  • Good cashflow
  • A clear proposition and market position
  • Successful long-term relationships with customers and suppliers

Also, buyers will value a clear strategic plan, they’ll want to know how will the company grow. Plus, of course, comprehensive, accurate financial information is imperative.

What detracts from business value?

Work like you’re in it for the long haul, even if you’re planning your exit strategy because the lack of a long-term strategy will ultimately detract from its value. Other value inhibitors include:

  • Dependence of a single supplier
  • An unclear customer profile
  • High cost to expand and grow
  • Competitive landscape
  • A business that can’t operate independently of its founder

At the end of the day, investors want to know how soon they can get a return. That means they will either take the profits and reduce costs, incorporate it into their own business, or make a commitment to grow the profit. That’s why it’s essential you communicate to the buyer how they can achieve this return.

Most buyers are on the lookout for a business that they can scale up, so a well-run organisation that boasts a flexible service or product, transparent accounts and a growing customer base will be more enticing for someone with the right vision and resources to progress it to the next level.

Link your exit plan with your personal financial plan

Your exit plan needs to underpin your personal financial plan, which is where your Xentum advisor can add most value.

A personal financial plan entails developing a clear picture of your desired post-exit lifestyle and means you can build a business to achieve the sale price you need. This is a far better approach than doing what the majority do – working to achieve an arbitrary sale price which may or may not underpin your lifestyle goals.

By working out your post-exit lifestyle, looking at the things you want to be able to afford to have and to do, you can have a clearer picture of what your business sale process might look like. Furthermore, you can work out when the right time would be for you to exit. This means you can sell your business knowing that it’s giving you what you need for your post-exit plans. Or you can continue to work, knowing what it is you’re working for.

Find out more about how we help entrepreneurs and business owners to exit their firms with confidence or book an exploratory discussion with a member of our team, you can specify an ideal time and date.