Factors that influence the value of your business

Selling and succession planning for a business is not something that happens overnight, as it requires careful planning, preparation, and execution. It's a complex and often emotional process that involves many stakeholders, such as your family, your employees, your customers, your suppliers, and of course, your potential buyers. 

However, it can also be a once in a lifetime opportunity to realise the value of your hard work and achieve your personal and financial goals, which is something to be excited for.

Even if you’re not planning to sell your business soon, we know the benefit of understanding your business’ value drivers – and having an accurate estimate of your business’ worth – can help a lot in improving the outcome when the time comes.  

So, what are business value drivers, and what is the best approach to getting an accurate view of your business worth?

Why the process of valuing your business is important 

Valuation is the process of estimating the fair market value of your business. For most established, profitable businesses, various factors are looked at, including historical and projected financial performance, industry and market conditions, competitive advantages and risks, and of course, growth potential.

Valuation as a tool for planning business exits is important for several reasons. Firstly, it helps set realistic expectation on how much your business is currently worth. This can be used as a benchmark to measure growth. It helps identify the value drivers of your business and in doing so, it can help plan for future success. 

Factors that can affect the valuation of a business

There are a number of both internal and external factors that influence value. Some of the main internal factors – which business owners will have most control over with the ability to track and measure them – include: 

1. Strong revenue. Businesses with robust recurring revenue have the capacity to demand higher prices. Strategies to improve recurring or strong repeat business include having good customer retention processes, which includes listening to your customers’ needs. The key is to make customers as sticky as possible now.
2. Profits. Revenue needs to flow to the bottom line. Ultimately, most small to medium-sized businesses are going to be valued with reference to their adjusted profits after taking into consideration any non-arm’s length transactions.
3. Working capital. There are various strategies to optimise working capital, but they take commitments and time to implement. This could include focusing on stock levels by carrying less inventory, reducing debtor days, by getting invoices out as early as possible, and by having good credit controls and having strong relationships with your suppliers to negotiate good payment terms.
4. Financial information. Good financial information helps run the business and make decisions on a day-to-day basis, as well help look holistically at the business from a strategic level. It also allows you to measure and track progress against financial KPI's. This is important if you have a multi-year plan to grow and exit the business. Also, investors and buyers from outside of the business need to have confidence in the numbers that you present to them.
5. Scale and efficiency of your business model. Ensure processes and systems allow for growth without proportional cost increases. This is done by investing in the right technology for your business and by having efficient operations. Another consideration is the strength and diversity of your customer base and your supplier relationships in general. The more diversified you are, the more you mitigate your risk.
6. Management team. Be able to show that the business can run seamlessly without the day-to-day involvement of you. This can substantially increase value in a challenging labour market. Staff retention is as important as ever to be able to run a sustainable business.

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Grant Thornton has the expertise to help businesses track and measure their performance to reach their aspirations – whether that be a successful exit or transfer to the next generation.

Grant Thornton, Private Business Tax & Advisory Partners Robert Ince and Hugh Perks, explore this topic in more detail, here:

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