Small business owners are often frustrated and confused about the decisions they need to make in their business. Some decisions are easy, and fit well into their wheelhouse; others so far from their field of expertise that they may as well be in an ancient glyphic language. A reality of business is the need to make effective decisions in a timely fashion. It really can’t be avoided.

While not all decisions would necessarily be termed strategic, it is these types of decisions we discuss here in the context of business value and value drivers. This is a companion piece to The Importance of Business Value for Business Owners. Here we are more concerned with the application of the ideas in this earlier article.

When you set out on your entrepreneurial journey, every choice you make has the potential to shape the company’s trajectory. Given the apparent importance of these decisions and the many options we are presented with, it is easy to lose sight of what truly matters. I advocate the use of business value as a method to provide a unifying direction to these decisions.

Understanding Business Value Drivers

As discussed in the earlier post, business value incorporates all aspects of your business that add value to stakeholders. In most cases, the most important stakeholder is the customer, but keep in mind there can be others. Business value is underpinned by various value drivers are the key elements that directly contribute to a company’s overall value and success.

Because of their role in driving value in your business, I believe they should serve as the pillars upon which every strategic decision you make should be based. By thinking in terms of these drivers, you can streamline your decision-making process and ensure that every action aligns with the overarching goal of enhancing company value.

Examples of Business Value Drivers

Value drivers are typically specific to an industry, but there are some common, generic factors that apply to most firms. Here are some examples to give you a better sense of what value drivers are, and how they might apply to your business.

Low Customer Concentration

Making moves to diversify your customer base is a strategic decision that increases the value of your business by reducing the risk associated with relying heavily on a few major clients. Businesses that avoid customer concentration issues can better weather downturns in specific industries or markets, and they are less vulnerable to sudden revenue drops.

Customer concentration is not just about the number of customers. Risks can also arise through a heavy concentration of customers in a particular industry, geography, or channel.

A marketing agency client worked consciously to maintain a portfolio of clients from various disparate sectors. They actively courted new clients in different industries instead of relying heavily on just one industry. A web hosting company I worked with had a reasonable range of clients, but one major retailer represented over 10% of their revenues. While this was a marquee client, the business impact of losing this single customer was catastrophic on profits.

Dependence on the Owner

Small business owners often build their business on the back of personal relationships with clients. This may build great loyalty (see below), but actually decreases the value of your business. At some point, the firm needs to pivot away from the owner being the connection point with customers.

More broadly, building a business that can function smoothly when you are not there is a key driver of value. Reliance on you for any critical part of the business operations means you are a bottleneck to business scale and market value.

I see this most often in family-owned businesses. Decision making sits with a family member (sometimes more than one), and innovation and growth initiatives require broad family agreement. Even making changes to improve overall efficiency can be stymied if the initiative did not come from a family member. These types of issues detract from business value when the family looks to exit: there is no decision-making depth once the family members leave.

Customer Satisfaction and Loyalty

A happy customer is a loyal customer. Businesses that prioritize delivering exceptional value to their customers through great products, exemplary customer service, and personalized experiences see increased retention rates and positive word-of-mouth referrals. A client with a restaurant had key staff regularly engage with their customers, seeking feedback and taking it seriously, and then acting on the feedback. Updating their dinner menu based on popular demand, altering their drinks menu, and even having a ‘secret menu’ for loyal clients. They boosted customer loyalty and attracted new customers through positive reviews and word-of-mouth. These all resulted in higher revenues and profits.

Efficiency of Operations

Streamlining internal processes, reducing waste, and optimizing resource allocation improve business value through substantial cost savings and improved productivity. Reduced costs drop directly to your bottom line. I have seen many clients make investments in new IT systems that resulted in orders-of-magnitude improvements in business efficiency with rapid payback on their investment. In one distribution business, improved inventory management reduced inventory holding period by over 100 days, reducing their warehousing cost nearly 25%, while improving revenues through fewer stockouts.

Impact on Strategic Decision Making

When small businesses consciously align their strategic decisions with these types of value drivers, remarkable transformations occur.

For me, the most notable change is the clear prioritization the focus on value drivers affords. The fog of indecision I so often see in small businesses lifts as business owners focus on actions that directly impact their growth and value. One client told me they felt that decisions were no longer a guess, or a shot in the dark.

But the benefits run much deeper. The clarity provided by the focus on business value also sees your strategic decision making being more consistent, enabling better alignment with long-term vision. I have seen major enhancements in brand identity, customer experience, and operational efficiency through this methodology. Your vision for your business is able to act as a true North Star. You can step away from being bogged down by short-term tactical thinking and sticking-plaster solutions, instead seeing your longer-term goals being actioned.

These benefits rub off on your employees as well. The clear sense of direction is motivational, and your team members have a deeper understanding of their role in the business. This has a mirror effect on you: being able to better articulate the importance of team members’ roles in your business cements their value to you as well. Engagement is lifted across the board.

Decisions anchored in business value drivers have a more solid foundation. I have found that business owners can better assess potential risks and rewards, leading to a more informed and calculated approach to risk-taking.

Action Points

To effect this relentless focus on the business value drivers in your business first requires you to understand what those drivers are. I will be adding content on identifying these drivers over the coming weeks. Stay tuned!

When undertaking a business valuation, I do a deep dive to understand the applicable business value drivers that appear to apply. I don’t list them all out in a valuation report, but this process gives me a deep insight into these factors for each client.

Having a high level of clarity when making key decisions in your business will revolutionize and reinvigorate your business. This doesn’t mean it is all plain sailing. There will still be challenges for you as a business owner. And, the approach is not without its negatives. I will look at some of these negatives in the next article in this series.