• Selina Bolton

9 Key Drivers of Business Value

There are many variables that affect the value of a business. In this article we have outlined nine drivers, or characteristics, that give insight into the viability of a business.



Why is it important to monitor the value of my business?

It will enable you to assess your company's strengths, profitability and cash flow performance, and implement strategies to improve results.


Outside of buying or selling an entire business, here are some other common reasons for valuing a business:

  • For investment purposes: a valuation is used to determine the price for issuing new shares or raising investment capital;

  • To develop an internal market for shares: a valuation can help to trade shares in a business at a reasonable price;

  • To stimulate management: a valuation can focus the attention and efforts of under-performing management, or reward those who go above and beyond.

Here are nine universal factors we consider essential to increasing cash flow and reducing risk, thereby enhancing overall company value.


1. Recurring Revenue

Businesses with sudden access to a new source of revenue may seem to be on an exciting upward performance trajectory, but one-time growth spurts are not necessarily a predictor of future stability or sustainable growth.


Recurring revenue is continuous income and valuable examples of recurring revenue include:

  • Instalment hard contracts: mobile phone networks

  • Auto-renewal subscriptions: software & digital products

  • Sunk money subscriptions: Amazon Prime, Bloomberg terminals

  • Straight-up subscriptions: magazines

  • Sunk money consumables: razor blades, Nespresso coffee capsules

  • Memberships & loyalty programmes: gyms and clubs, Starbucks

Recurring revenue is not only good for business, but it also ensures you'll get the maximum value when it comes to selling it.


Read Next: 6 Recurring Revenue Metrics (and why they matter)



2. Sales Predictability

This is the ability to systematically create revenue consistently year-on-year. It is also

providing business growth based on a formulaic process – not last-minute hustling and

guessing.

This way, you’re “predicting” how much revenue your business is generating.

To achieve sales predictability, you must:

  • Understand your sales funnel

  • Determine the acceptable average deal size

  • Define time frames for each stage of the sales process

The sales process must become a system. Without it, you have no predictability.


Read Next: 3 rules for building a predictable and repeatable sales model



3. Niche Positioning

Many people believe that by striving for a market position that has wide appeal, they’ll

only need to capture a small percentage share to be profitable.


What they don’t realise is that even a small share can be remarkably difficult to obtain in

a highly competitive market. Often, it’s a challenge to be the “low price provider” or

“best-in-class service”.


By owning an identifiable market position or niche that may appear to be on the fringes

of the market, you may improve your chances for survival and success.


Here are three compelling reasons to be niche:

  • Impactful: it provides your business with an identity and gives customers who are unfamiliar with your business a reason to consider dealing with you.

  • You’ll be able to defend your business, match your position well against the needs and wants of a niche market, and you’ll build a loyal client base that won’t be easily swayed by competitors’ offers.

  • You can organically grow your niche by servicing the needs of a particular market niche well. This will also encourage word-of-mouth marketing.

A company that intelligently analyses the market, and understands the potential of an

unexploited opportunity, has the advantage to realise significant growth and demonstrate

their value proposition to customers and investors.



4. Sales Growth

Year-over-year (YOY) growth is a key performance indicator that compares growth in one period (usually a month) against a comparable period twelve months before.


Unlike single month metrics, YOY growth helps you remove seasonal effects, monthly

volatility and other factors to arrive at a clearer picture of your actual success over time.

This makes it a highly useful aspect of your valuation analytics.


As an example, monthly sales growth of 30% for October may seem like a massive jump

worth celebrating. However, when compared to a year prior, when growth was 35% that

number indicates a moderate slowdown, not a spike.


It’s good to combine the longer-term perspective with similar measures such as month-over-

month and quarter-over-quarter, which help you analyse different aspects of yearly

growth and see how your organisation is performing comparatively over a 3- or 5-year

period.


Are they trending upward? If not, describe in your growth plan the value drivers that

must be strengthened to provide the necessary increases in future sales and cash flow.


In addition to the overall sales value metric, it’s worthwhile tracking conversions, average

sale value and other revenue-related metrics to assess your company’s performance and

compare this against your market peers to highlight areas for improvement.


Is your sales growth faster than your industry average?


5. Positive Profit Trends

The goal of any business is to improve its net profit margin. It reflects a company’s ability

to turn revenue into profit after accounting for all the expenses of running the business,

including taxes and debt payments.


A scalable business is one in which profit margins increase as revenues increase. Profit

margins increase because costs do not rise in lockstep with increasing revenue.


Other value drivers such as efficient operating systems and processes, as well as your

business model, can improve profit margins as revenue increases too.


When a company’s net margin exceeds the average for its industry, it is said to have a

competitive advantage, meaning it is more successful than other companies that have

similar operations.


While the average net margin for different industries varies widely, the manner in which

businesses can gain a competitive advantage remains constant.


How?


By increasing sales revenue as well as decreasing your operating costs and benchmarking

your business to see where you can save money.


6. Business with a 2iC (second in command)

Having a management team is important to achieving peak value. But what often happens

when a management team is built is that no one is able to step up and run the company if

the owner were to step down – there’s no second-in-command (2iC).


Having a 2iC is integral when it comes to selling your business, especially if you plan to

leave shortly after.


In a situation where the success of a company is dependent on the founder or owner of

the business, having a 2iC helps enhance investor confidence.


Also, it allows you to be away from your company with the assurance that it will

continue operating in your absence.


7. Large Market Size

How does market size affect the value of my business?


Market research is an important step in the development of any business, regardless of

industry. It provides insights that can drive the future success of the business, including

potential market size, or the total number of buyers for the product or service.


Market size also determines the potential revenue that your business could generate.

Therefore it should be a major factor in your business strategy. It should also influence

the product or services your company creates. It also prevents you from discounting

innovations with huge potential.


Implications:


The implications of market size for any business success includes profitability,

competitive advantage, business strategy and consumer behaviour trends – all of which

influence your business path to growth and enhance value.


Market size or the number of potential customers or unit sales is one thing. What they’re

worth is completely different and perhaps a more important figure. You need to know

how much revenue that market has to offer.


Realistically, no start-up should or can expect to gain 100% market share. Our advice is to

initially target several niches, price points, customer sizes or geo areas for rollout.


8. Customer Diversity

How do customers affect the value of my business?


Your customer base has a major impact on your company’s value in the marketplace. A

diversified customer base insulates your company from the loss of a major customer.


Ideally, no single client should account for more than 8-10% of your total sales.


Consider the following:

  • Gross revenue by customer by year – it will show you the percentage of total revenue each customer generates year-by-year

  • What industry sectors do you serve?

  • What geographical areas do you serve?

  • Pay attention to your accounts receivable and aging report because this will indicate if your customers are facing cash flow issues


9. Customer Value

Understanding customer value is by far the most important thing you can do to identify

ways to grow your business. If you understand the value of your customers, you can:

  • Determine which customers to invest in

  • Identify new customers and markets to target

  • Determine which product and service lines should be offered and promoted

  • Change pricing to extract more value

  • Identify the unprofitable customers you should “fire”

  • Understand where to cut costs and investments that are not generating growth

Your customers are the lifeblood of your business. A robust understanding of the lifetime

value of each of your customers can provide an even clearer view of the value of your

business, plus the potential opportunities to increase value going forward.


Conclusion

Ongoing assessment of business value drivers is integral to success. The valuation process

involves both a quantitative and a qualitative assessment of a company that should be part

of any business owner’s standard operating procedure.


Take the time to stop and objectively assess where your business stands today and identify the actions to take to grow your business successfully.

WANT TO KNOW MORE?

Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.

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