What is Business Value and How Can You Increase It?

December 18, 2014

DVIRC’s objective is to help our clients build the value of their business. In many instances, their business is their largest single holding, frequently accounting for about two-thirds of their entire assets.

So what is business value?

Business value is determined by what a willing third party will pay for the business on the open market. Even if you are not considering selling your firm you should think about its value from an outsider’s perspective.  An outside buyer will invariably pay more for sustainable, transferable profits.

Most business owners focus on the last of these three words— profits.  And indeed, the most heavily weighted of DVIRC’s 28 drivers of business value are connected with company finances.*

Unfortunately, many business owners neglect the first two words—sustainable and transferable, which lead us to 3 conditions that diminish value and where most often profits are not sustainable or transferable:

  • A highly concentrated customer base. Lose a key customer and the company can vanish! Unfortunately, a lack of diversity in the customer base is characteristic of many small and medium- sized manufacturing companies.
  • A weak management team would struggle to meet customer expectations without the owner. Why should a buyer pay a lot for a company when the past owner is the principal source of value? In the shorter run, a weak management team will ultimately restrict growth, since at some point the key leaders upon whom the business depends get tired, and after all, there are only so many hours in a day!
  • A concentration of key knowledge or expertise in one or two individuals. For example, if technical expertise resides in one or two individuals, what happens if they leave? Similarly, if sales are dependent on a key salesperson – or the owner – what happens to those sales if the person “pursues other interests?”

How does one drive value upwards?

Knowing about these problems is one thing; doing something about them is another. And for most enterprises, improving value in a significant way is difficult in the face of day-to-day pressures and activities. The best way to overcome the daily whirlwind and make your business significantly better is to follow four disciplines*:

  1. Identify a very few (1 or 2 are best!),  very important goals. Express them in a SMART (specific, measurable, actionable, results oriented, time bound) format. These are typically lagging indicators of success.
  2. Identify activities and associated measures that should directly improve the above indicators. These are leading indicators of success.
  3. Develop a scorecard based on the above.
  4. Create a cadence of accountability by having frequent, brief meetings to review the activities and the scorecard.

Clearly this is easier said than done. But it can be done! You will have a more valuable company and a better personal life in return. Sustainable, transferable profits—the key to increasing the value of your business.

Harold Floyd is DVIRC’s Business Solutions Advisor

*To learn more about, or request DVIRC’s complementary Value Component Assessment, or our four disciplines to help drive sustainable and transferrable profits contact Mark Basla, vice president, marketing and business development at 215-464-8550.