I have long believed that business value lies at the heart of being a business owner. Business value lies at the heart of how we see our business, how we make decisions, set strategies, and even our aspirations. I believe it is therefore imperative for business owners to first understand the concept of business value, and then put it into action.
This article addresses the first of these imperatives: understanding the business value concept. I will cover its application in later posts.
What is Business Value?
Business value encapsulates the economic worth of a company, covering both tangible and intangible aspects. It is the sum of factors such as financial performance, assets, market position, intellectual property, and customer relationships. It is an holistic assessment determining the benefits stakeholders derive from the business.
Your business value is underpinned by value drivers – those elements in your business that significantly influence the value of your business in your industry, and based on your business model. Common value drivers in small businesses include contracted repeat business from customers (e.g., subscriptions), a diverse customer base, customers prepaying you for what you provide, and a long term lease in a high-traffic location.
Effective implementation of these sorts of factors make your business more valuable to buyers – even if you are not planning to sell. Explicitly, the things that make your business more attractive to buyers are the key value drivers upon which you should be focused.
As an illustration, think about what is more valuable to a buyer:
- A business with most of its revenue coming from repeat business, or one where the revenues are purely transactional.
- A business with a modern and efficient Point of Sale system already in place, or one that was entirely manual?
- A business where the owner is involved in everything that happens in the business, or one where most of the activity is undertaken by skilled employees?
- A business with one large ‘whale’ of a customer, or a business with a diversified customer base?
Understanding what is of more value to a buyer of your business helps you appreciate the value drivers in your business. And a focus on these value drivers is simply good business. These are things you should be doing anyway to build a successful business.
The Significance of Business Value and Why It Matters
Understanding the value your business creates, and how that value is created, enables you to strategically plan for the growth of your business by investing in those areas that create value and allocating resources in ways that enhance value. We talk about the alignment of the decisions you make today with your long-term vision by asking “How will this decision enhance the value of the business?”
You are probably already using business value in your decision making around investments, but possibly not deliberately. The typical goal here is to be maximising the return on investment, and selecting between potential investments based on risk and returns. This same type of thinking may get you to be looking at benchmarking aspects of the business, and identifying areas of your business for improvement or removal.
Business value is also useful when attracting new investors, entering into partnerships, or raising debt. Demonstrating that new funds will be applied to the areas of highest return in your business – and that you know what these areas are – gives confidence to these external parties, and gives you negotiation leverage.
An aspect of a business value orientation on a business that often surprises my clients is through the strategic clarity it provides. This clarity markedly improves employee engagement. Understanding their part in creating value, and being aligned with the company’s goals is motivational. Employees understand their roles better. And with higher levels of motivation comes lower turnover, and an enhanced ability to attract good talent.
A focus on business value also reprioritises the questions you need to ask yourself about your business. Those important matters you have put off come squarely into focus, such as:
- What is my exit strategy?
- What is my succession plan?
- What is my business legacy?
What is my Exit Strategy?
Whether you’re considering a complete exit or structured ownership transition, understanding your business’s value is pivotal. You build an understanding of what you’ll have in your wallet when you exit and enables you to consider whether that meets your goals. If the current value is below your goal, you can build a pathway based on the value drivers for your business to increase the value.
When you come to exit, your understanding of the business value guides your price expectation, negotiations with brokers and potential buyers, and your prefered deal structure to achieve your goals.
What is my Succession Plan?
Determining business value is a cornerstone of succession planning, especially when passing the torch to family members or successors. It influences the feasibility and effectiveness of your transition strategy.
What is my Business’s Legacy?
While the financial bottom line is undoubtedly important, the impact of your business stretches far beyond the balance sheet. One aspect that’s often overlooked is the legacy and reputation your business leaves in its wake. Business value plays a pivotal role in shaping this legacy, and its success contributes to your standing within the industry and community. I am seeing this being an increasingly important factor for business owners.
Never underestimate the lasting impact your business legacy can have on the industry, community, and the individuals you engage with. By understanding and leveraging your business value, you’re not just creating financial success; you’re shaping a legacy that can endure for years to come. While it won’t turn up in your balance sheet, your legacy and reputation are among the most valuable assets you’ll leave behind.
Risk Management
Identifying value drivers and vulnerabilities empowers you to proactively address risks, ensuring your business’s resilience in the face of challenges. In business, uncertainty and challenges are part of the game. This is where the focus on business value helps. By comprehensively understanding the factors that contribute to your business’s value, you gain a strategic advantage in anticipating, mitigating, and responding to risks.
Value Drivers as Risk Shields
Value drivers are the core aspects that amplify your business’s worth. These encompass operational efficiency, market share, brand reputation, customer loyalty, and more. Recognizing these drivers not only enhances your business’s value but also acts as a line of defense against potential risks. For instance, a diversified customer base and strong brand equity can mitigate the impact of sudden market shifts or economic downturns.
Identifying Vulnerabilities
On the flip side, thorough value analysis uncovers vulnerabilities that could expose your business to risks. Whether it’s overdependence on a single supplier, inadequate cybersecurity measures, or regulatory compliance gaps, understanding these weak points is the first step in fortifying your business.
Proactive Risk Mitigation
Armed with a clear grasp of both value drivers and vulnerabilities, you’re better equipped to take proactive measures. Instead of reacting when a risk materializes, you can create contingency plans, implement risk-mitigation strategies, and allocate resources to address potential challenges before they escalate. This not only minimizes potential damage but also showcases your preparedness to stakeholders.
Enhancing Business Resilience
By aligning risk management with business value, you cultivate resilience. The ability to adapt and navigate uncertainties becomes a competitive advantage. When your business is built on a foundation of well-identified value drivers and a comprehensive understanding of vulnerabilities, it is better positioned to weather storms, pivot when needed, and emerge stronger from adversity.
New Opportunities
A laser focus on your business’s value and the drivers that underpin it isn’t just about understanding its worth; it’s a transformative strategy that can open the door to a range of new opportunities for your business through growth, innovation, and strategic advancement.
Grow Your Core
Your business core is the central area or aspect of what you do. It is where your main operations, products/services are focussed and provide your competitive advantage. In most cases, your lowest hanging fruit for growth and innovation will be found in your core.
By identifying the key drivers that contribute to your business’s value, you can pinpoint areas of strength that are ripe for expansion. Whether it’s a particular product line, a customer segment, or a geographical market, leveraging these drivers can guide your expansion strategy and help you capture untapped markets.
Develop New Adjacencies
A core adjacency is a strategic expansion pathway into a new market or industry segment that is closely related to your existing core. These are generally the easiest market expansions for your business, based on leveraging as many of your company’s existing strengths, resources, and capabilities as possible. This growth pathway enables you to complement your core operations while diversifying revenue streams or customer base in lower risk, smaller steps. Core adjacencies typically involve developing related products, services, or solutions for the same or similar customers, capturing additional value while managing risks effectively.
The value drivers of your core business are based on your unique strengths and capabilities. Core adjacencies take this knowledge as a catalyst for innovation, inspiring new products, services, or solutions that align with these strengths and cater to these different market needs.
Entry to adjacent markets may be by way of partnership or collaboration. As discussed above, being able to highlight your business strengths gives you leverage in these negotiations.
Exploitation of Core Competencies
The idea of a core competency runs deeper than a competitive advantage. A core competency is part of the very essence of your business, and is a unique and distinctive capability, skill, or set of resources your business has – and not all businesses have them. Core competencies are not easily replicable by competitors and contribute significantly to your company’s success and sustainable differentiation.
Leveraging your core competency gives you a springboard into markets quite far from your core, but at lower risk than others might face. This enables you to look more broadly than just adjacencies; it openss up whole new markets.
Business Value Drives Personal Wealth
Your business’s value drives your net worth and longer-term financial security. In turn, this informs your personal financial planning, retirement strategies, and wealth management.
Remember, business value is not just a number; it’s a compass that guides your business journey. By understanding and harnessing this concept, you equip yourself with the tools needed to steer your business towards success, make informed choices, and secure your financial future.