Start Now! An Action Plan to Increase Your Business’s Value

An 8-step action plan to start building your business valuation now, before it’s too late for your strategies to have a material impact on your business's value when the time comes to sell.

Business Owners: Make your effort, determination and sacrifice worth it!

Owning and building a business is hard. It takes effort, determination, and sacrifice.

So when the time comes to exit your business – whether that’s in the next few years or well into the distant future – you want and deserve to achieve a valuation that makes that effort, determination and sacrifice worth it.

Too often however, a business owner won’t think intentionally about building the value of their business until just before they decide to sell, at which point it is often too late to dramatically increase its value.

To make sure that you don’t lose out on any significant value, in the years leading up to an exit, you need to think strategically and purposefully about growing your business – not just selling it – with a clear focus on the key drivers of value in the mind of a potential buyer.

So how do you decide which areas to focus on to dramatically build the value of your business?

Leonherman recently hosted an event attended by business owners and directors called “Unlocking Your Business Value”. After the event, attendees were given an action plan to follow to start building the value of their businesses and to help them identify the key drivers of value in their businesses.

Here is that 8-step action plan for you to take into your business to build your business valuation.

Here’s the key point: start planning and implementing your value building strategies now, before it’s too late for them to have a material impact on your business value…

1. Plan Early! Don’t leave it too late.

This first point is essential. As a business owner you need to start planning well in advance of selling your business to ensure you do not leave any value behind when the time comes to exit, preferably more than 3 years before sale.

If you only start to focus on building your business value after you’ve decided to exit, or just before, you’re unlikely to realise the full value that could have been built up in the years preceding the business sale.

Implementing strategic plans take time.

To coin a phrase, building your business value should be a marathon, not a sprint. Focus on growing your business over the longer term, not just on selling your business in the short term.

Start now!

2. Build and Demonstrate ‘Maintainable Profits’

Ultimately, your business is worth what a buyer is willing to pay for it.

Negotiations about its value will typically start based on a multiple of maintainable profits. And the majority of businesses are sold for between 2x and 6x maintainable profits although some of our clients have achieved multiples much higher than this.

A primary driver of your company’s valuation is your ability to reliably predict profits into the future and to prove to a buyer that those profits will be sustained, or better still, continue to grow over time.

The profit figure that is typically used in company valuations is your ‘EBITDA’ – ‘Earnings before interest, taxes, depreciation, and amortization’ – as this is a good measure of a company’s profitability that excludes these non-operating expenses.

So how do you improve your EBITDA?

By increasing your revenue and sales, increasing your pricing, rigorously managing expenses, reducing debt, negotiating better rates and prices, and improving your efficiency and productivity.

Crucially, you will also need to show any prospective buyer that robust financial management, reporting and governance is at the heart of your business.

3. Identify Key Drivers of Business Valuation Multiplier/Earnings Multiplier

As we said, when determining the value of your business, a multiple of maintainable profits will be used, often called the “Business Valuation Multiplier” or the “Price Earnings Multiplier.”

The final multiple used in the valuation calculation will be a function of general economic conditions, the market perception of the business, your sector’s market valuation multiple (based on historic transactions or valuations of similar companies in your sector), competition between buyers, the buyers’ expectations for profit growth, and crucially, any key characteristics of your business that might affect future earnings.

While some of these factors are outside of your control, many of these key drivers of value are determined by the strategic decisions you take inside your business.

As a business owner, it’s critical that you identify the key drivers of value for your business, improve these drivers of value, and establish a management system and KPIs to measure them consistently.

And while there are several factors that will impact on the multiple – Our Corporate Finance team can share a more comprehensive list of the most common drivers of business value – in our experience, some factors are more important than others from the buyer’s perspective.

In particular: are there any “single points of failure” in your business?

Is business performance dependent on you, or a handful of key individuals? Or does your success rely on a small handful of clients, contracts, channels, or suppliers?

If yes, then the risk to the buyer is significantly increased – as future profits might not be sustainable – and the multiple used in your business valuation will be reduced.

Another key factor that affects the multiple is whether you have a high level of recurring income and a top performing sales engine.

If you have to consistently bid for work, or rely on infrequent, serendipitous sales, then the multiple used in your business valuation will not be as high as it could be.

Your job as a business owner is to identify the areas in your business that will affect the valuation multiple and take definitive steps to improve your performance in these areas.

4. Carry out an objective assessment of your current position

Once you have identified all of the key factors that affect will affect your company value, you need to carry out a thorough and unbiased evaluation of your current position.

Identify which factors are most important to your business and industry and then your performance against each factor.

Try to take the viewpoint of a potential buyer and identify the key factors that will affect your company valuation from their perspective.

You will need to carry out a deep dive into your financials, operations, market position, and competitive landscape. Only by having a clear picture of where your business stands and what needs to be done can you start to increase its business value.

This objective analysis should form the basis for your strategic planning and future decision making. And whether you plan to sell your business or not, this is a very useful exercise to give you a strategic roadmap to improve the performance of your business.

If you are considering a sale in the next few years, and would like an objective perspective, Leonherman can do this for you, taking the role of a potential buyer and identifying the areas in your business that need focus and improvement.

5. Be clear on your business vision AND your personal vision

Before you embark on executing your strategy, you need to be clear about your future business goals and also your personal goals.

As a business owner, your business’s goals and personal goals are inextricably linked, but often, business owners will only think about the business ambitions and neglect their own needs.

Be clear about what you’re aiming for personally. Know when you would like to step away and have an idea of the value that you would like to achieve to give you the life you want after you exit.

Having a clear personal vision will provide you with direction and motivation.

And your business vision will inform your roadmap for growth, provide a direction for longer-term planning, motivate your team, help you to align all business activities towards a common purpose, and provide a benchmark against which you can measure progress.

6. Put plans in place to bridge the gaps

Now that you have objectively analysed your current position and have a clear vision for the valuation you want to achieve, you need to make strategic plans to bridge the gap. Focus on building maintainable profits and the key factors you’ve identified in your business that will determine the valuation multiple.

Identify your strategic objectives, outline clear action steps, assign responsibilities and define key metrics for each valuation driver that you can measure, monitor and reward.

7. Build a team to deliver your strategic plans

Once you’ve determined your strategic plan and the key actions to take, you will need to build a team to deliver.

Start by assessing the capabilities of your existing team members. Do they have the skills, knowledge, and resources to achieve your objectives?

If they don’t, then consider training and development, hiring new talent, or outsourcing certain tasks.

Building a solid management team will also have the added benefit of increasing your business valuation by making your role dispensable – removing you as a single point of failure – and by proving to any potential buyer that profits are likely to be maintained into the future even if you choose to step away from the business.

8. Actively lead and manage change

Carrying out your strategic plan will probably lead to significant changes in your business and you will need to lead and manage this change effectively with clear communication, active leadership, and by getting your employees engaged in the process.

As the business owner, you should communicate your vision for the business, clearly articulate the reasons for change, and outline the benefits it will bring to your employees beyond simply increasing business value for your benefit.

Active leadership means you should lead by example and address resistance and concerns promptly. Show employees that you value their input and are willing to adjust where necessary to ease the transition.

Involving employees in the change process should reduce resistance by making them feel more valued and part of the solution.

You should also provide any necessary training and support for your change initiatives and make sure you recognise and reward performance.

Don’t Wait! Start now!

The last thing we want is for the effort and sacrifice you’ve put into your business to not be matched by the valuation you receive when you exit.

But unfortunately, effort and sacrifice will not be enough to ensure that you will get a high valuation.

You need to be strategic and deliberate about growing your business’s value, have a clear understanding of what a potential buyer will be looking for, build maintainable profits and focus on the key drivers of value in your business.

And while this might seem quite daunting, the truth is that if you’re already focused on growing your business, building a profitable business, and striving to constantly improve, then your business valuation should look after itself.

Crucially, if you are considering a sale in the relatively near future, you need to start implementing your value-building plans now. As a minimum you should be planning 2-3 years before an exit.

Don’t leave it until it’s too late, and you will achieve a valuation that makes your effort and sacrifice worth it – literally.

Thinking about selling your business? Contact our Corporate Finance team

If you’re thinking about selling your business or securing an exit in the next few years, or even sooner, then Leonherman can help you. Contact our Corporate Finance experts today, in strictest confidence, to find out about our Corporate Finance services and to speak to one of our expert advisers.

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