Why Business Value Drivers are important for Exit Planning

If you want to increase the exit value of your business (and who doesn’t?) it’s essential to create sustainable and transferable value. In other words, create value that will ensure the business continues to operate successfully, with little or no disruption to its cash flow, after the owner has left.

It doesn’t matter whether you’re thinking of selling to a third party company, handing the business on to the next generation of your family or selling it to someone within your business. If the underlying value is dependent on the owner any buyer will quickly identify that the deal is too risky. Result – you won’t be able to achieve the price you hope for and you’re unlikely to get all the money up front. Also it’s very likely that you won’t be able to leave the business after it’s sold.

Value drivers can be tangible, e.g. physical assets, cash etc. but there are a range of intangible, “hidden” assets that have strategic value. Some, like sustainable revenues and cash flow are common to all types of business whereas others, for example Intellectual Property, licensable products etc. will be more industry specific.

Here are just a few other ways to build transferable value:

People – Create a first-class management team capable of creating growth and managing the business without you. Buyers will want key employees to stay in the business to deliver the financial results you’ve forecast, so the quality of your team has real value. It also will provide continuity during the integration of the two businesses.

Processes and Procedures – these demonstrate that the business can be maintained profitably post-sale and help to control quality and costs. But don’t limit these to operational processes; include HR policies and processes, employee communication systems, client management systems etc. All these things show that a business is well managed and can run effectively without its owner.

Clients – One of the main value drivers is your customer base and the more diverse it is the more value it attracts. It’s important that no single client represents more than 10% of revenue and ideally no more than 5%.   Not only does this help to protect your business from the loss of any single customer and the associated risk of serious cash flow issues if one or more customers are lost, it also mitigates the risk of economic factors in certain sectors so if the client base covers a range of industries, even better.

Products and Services – diversify the range and if possible create recurring revenue streams. Be sure to analyse whether you have the resources to achieve this. If you can’t do this internally how about distributing products from other suppliers or entering into licensing agreements to manufacture products developed by other companies.

Growth PlanningAcquirers are paying for the future of your business so having a realistic, budgeted and achievable growth plan that demonstrates future growth and profit is a real value driver in a buyer’s eyes.

Underpinning all this is the need for a robust Financial Management system. This is the engine for growth that will drive your business forward, enabling you to manage working capital effectively, control your costs, manage cash flow, create targets and deliver your forecast results. Monthly management accounts are a key part of a financial management system, facilitating proactive financial control and giving you a great tool for business decision making.

If you are considering selling a business within the next 3 years it’s important to start preparing now. The most successful transactions are those where the vendor has spent time getting the business into shape and has a clear exit strategy. For further information please call us on 0118 959 8224.

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