When it comes to considering a future sale of a business, it is imperative that every entrepreneur understands the key drivers of value in their business. This insight is crucial for applying a growth strategy to optimise business value. Here, we focus on some aspects that are often overlooked by business owners that can have a negative impact on a business’ valuation and a business owner’s ability to extract maximum value from the business.

1. Succession planning

Many companies are driven by individual entrepreneurs who build the business without a succession plan or strategy in place. Succession planning is essential in grooming and arming the next generation team of executive managers and employees with the necessary skills to assume the responsibilities of the business in a seamless manner. A company succession plan creates value by:

• Ensuring that the business can continue operating as a going concern in the event of any unforeseen changes in key management personnel
• Delegating duties and reviewing roles that will reduce errors and improve quality of business outputs, particularly during times of change or in response to the loss of a key person
• Maintaining the legacy of the founding entrepreneurs’ vision, company-wide assimilation of the owner’s knowledge and proven business model
• Creating an ideal framework for the next generation managers on which to develop and grow

Company succession planning should include mentoring, employee engagement and open communication without top management feeling that the company intends on replacing its existing executive managers. Company succession planning should be viewed as a process of grooming all employees with a view to limiting key man risk. It should be communicated that this process builds the business resilience, cements the company’s value and is ultimately as much in the interests of employees as it is in the interests of clients and shareholders.

2. Do not overlook the qualitative factors

While quantitative factors (such as performance management and financial metric monitoring) are natural points of focus and attention for owners, internal qualitative factors such as planning, leadership, sales strategy, marketing, human resourcing, operational rigour, and legal management are less natural. This is partly due to the difficulty of assessing and quantifying their impact on the bottom line as well as the seeming disconnect between action and result. As a result, these factors are often disregarded but nevertheless remain vital influencing factors that will affect the value of the business.

3. Focus on the future, not just the present

Business value is optimised when the planning and strategy is just as focused on delivering results over the next 3-5 years as it is on the immediate present. Businesses are long-term investments, and the majority of their value stems from their ability to continue to reliably generate revenue and cash flows over the coming years. Business value creation is an ongoing process and includes:

• Creating or expanding both once-off and recurring revenue streams
• Increasing returns on existing assets through optimised usage, deployment and / or financing
• Discontinuing under-performing and non-core / non-strategic activities
• Creating or expanding barriers to entry and competitive advantages
• Reducing and / or mitigating company-specific risk
• Refining the marketing efforts and client acquisition targets and strategy

Value leadership assists the executive managers to view the business from both an investor’s and an owner’s perspective, enabling better holistic decision-making.

4. Protect IP value and intangibles

Some business’ value is driven by its intangible value, such as trademarks or intellectual property, proprietary methods, software, licencing and customer relationships. Business owners should therefore identify these key elements and take the necessary steps to protect them, thereby protecting their own business value and long-term prospects. Apart from protecting the company from unexpected financial impacts that can be recovered through business interruption, workers compensation, and other forms of liability insurance, there are a range of ways to protect company value:

• Obtaining patent and trademark protection (legal registrations)
• Employees signing intellectual property assignment, non-disclosure and non-compete agreements
• Securing buy-sell agreements and insurance that enable owners to execute succession plans effectively
• Conducting a needs and risk analysis as a precursor to securing insurance arrangements to cover areas of intolerable exposure
• Taking actions to limit the loss of brand quality, reputation and client trust

5. Have a firm grip on customer value

Setting a high standard of customer value delivery raises customer benefits and creates natural barriers to entry and competitive advantages for the business. Although many business owners view customer value as being created by providing consumers with the lowest price, highest quality, and best service, these factors are often at conflict with each other and can be addressed by adopting a customer-centric approach. The following actions can guide the business towards establishing a robust view on how to nurture and defend their client value proposition:

• Clearly segment and explore the cultural, geographic and demographic landscape of targeted customers
• Identifying the elements of the business’ product or offering that clients really value and those that they do not
• Understanding how customers view the business’ product or service offering relative to competitors and substitute products or offerings
• Establish a mechanism and process for collecting and reviewing customer feedback, as well as a means of incorporating these learnings into future products and offerings

A natural step following the review of the client value proposition is a review of the business pricing and pricing strategy. Pricing can be a key tool in adapting clients’ perception of the product or service offering, as well as a key lever in accessing specific segments, or closing the door on unprofitable and detrimental segments.

6. Spend time planning

Without planning, time is often spent putting out fires and dealing with the urgent crises. Planning affords business owners and managers an opportunity to set proactive goals and objectives, as well as to establish solutions for key business issues. A good starting point for medium to long-term planning is to conduct analyses across the following range of topics:

• Competitors, their offerings and how favourably your business compares
• Resourcing, talent management and alignment of staff to business objectives
• Sales and cost experience analysis, trend identification and movements in business margins
• Operational review, focussing on areas that are high risk, low reward and / or high impact
• Horizon scanning, looking at events or trends that have the potential to impact your business, competitors or the industry over the coming years

Demonstrating that the business has spent time planning for the future is an easy way to shift a valuer’s or buyer’s view of the business from reactive to proactive. Proactive business’ are far more likely to weather the storms and capitalise on opportunities than reactive ones, and that is definitely worth something.

Conclusion

These general determinants are far from an exhaustive list but serve as a guide for value optimisation initiatives. There is no one-size-fits-all list for every business, and it is important to get the right types of insights from experts that can assist the business from within its own context.