The 3Rs: Three key factors that will seriously impact the value of your business

Three factors that will seriously impact the value of your business

At The Uncommon Practice, we exist to grow the value of our clients’ businesses from day 1.

So that when the time comes to sell or to exit your business, whatever your personal motivations, you will have built a business that is desirable, and you can get a sum of money that makes all the effort worthwhile.

We do this for our clients by helping business owners to improve their financial performance, their EBITDA, but also by focusing on and developing the areas of the business that will increase the valuation multiple – the multiple used when valuing a business – often referred to as the Earnings Multiplier or the Business Valuation Multiplier.

And while we are firmly on the side of the business owner, ultimately, the business is only worth what a buyer is willing to pay for it.

In our experience, when a buyer looks at each area of your business, there are three main factors on their mind that will significantly impact the valuation multiple.

We call them the 3Rs: Return, Risk and Readiness.

If you get these right in your business, you will make it business irresistible to buyers and seriously increase the value of your business.

1. RETURN

Higher Probability of Return = Higher Business Valuation

In essence, the value of your business is the present worth of its future income.

Your company valuation will come from 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.

Buying a business is an investment and you must prove to a buyer that they will see a return on their investment.

If you can’t sufficiently convince a buyer that the business will continue to grow after their purchase, then you are unlikely to achieve a high multiple and the business valuation you want.

As you’ll see later, the good news is that there are many ways to demonstrate to a buyer that your business will have a high probability of return and ongoing growth.

2. RISK

Lower Perceived Risk = Higher Business Valuation

Risk is a primary concern for any buyer.

Owners who are very close to their business can sometimes lose sight of any inherent risks the business may be facing.

But buyers will have the opposite approach. When deciding whether to acquire your business, they will aim to uncover any risks that may impact on their investment and analyse every possible risk in detail.

Above all, a buyer will be concerned by any risks that will stop your business from achieving its predicted future earnings and profits, so they will always do their due diligence.

You must minimise the perceived risks in the mind of the buyer. As you’ll see, one of the key ways you can do this is to remove and single points of failure from your business.

If you can do this, then your business will be worth considerably more to the buyer and your multiple will be considerably more.

Fortunately, as we’ll show you, you can mitigate against many of the buyer’s perceived risks before you put your business on the market.

3. READINESS

Minimal Integration Cost = Higher Business Valuation

Many investors, particularly trade buyers, will carry out a simple analysis when deciding whether to purchase your business: “Is the cost of purchasing your business less than the cost of setting up a similar business myself?”

If the integration of your business with the buyer’s existing business is simple and minimal – if your business is ‘ready- made’ for them – then the answer will be yes, buyers will want your business, and they will pay handsomely for it.

Your aim should be to minimise the perceived integration phase with the buyer’s existing business.

For example, if you’ve put a quality management team in place that will continue to run the business, your business will be valued highly.

If you can save an investor the costs of developing a similar brand and reputation in the market, then you will get a higher business valuation.

Likewise, if you’ve built a large, diverse customer base; if you’ve developed cutting edge technologies protected by patents; or if you’ve recruited and trained a team of highly sought-after experts, then your perceived ‘readiness’ will make your business highly valuable.

Even if your business is only a few years old but you can prove that you have developed unique technology, processes or IP, and will save the investor the time and effort of building the same capabilities themselves, your valuation will be significantly higher.

What should you do as a business owner or director?

In our experience your business valuation will be significantly impacted by the 3Rs and the buyer’s perception of each of these factors:

1. Return and Growth – Make it clear that the buyer will get a financial return

2. Risk – Minimise any risk factors that could stop the buyer from getting a return

3. Readiness – Prove that there are minimal integration costs and that buying your business is more cost effective than the buyer setting up their own business

We’re confident that by focusing on these key drivers of business value, you will find it easier to determine where and how to build value in your business.

Of course, we’d be happy to guide you. If you’ve got plans to sell your business, contact us today to find out how we can help you to grow the value of your business from day 1.

Download our Free 54-Page Guide: How to Seriously Increase the Value of Your Business

This article is taken from our free 54-Page Guide for Business Owners and Directors: How to Seriously Increase the Value of Your Business.

The guide will help you to get the sale value you want and deserve, and ensure that when the time comes to sell your business, your guts, drive, commitment and sacrifice will be worth it – literally.

You will also get a Valuation Scorecard to use in your own business to increase your business’s value.

Find out more about the guide and download it here.