IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Kelly Deis of Soundpoint Consulting (www.soundpointconsulting.com).
The Three Pillars of Business Value
Most business owners focus on increasing profit margins as the primary means of improving the value of their business. Profitability is absolutely important, but it is not the only factor to consider.
In fact, there are three components which can increase – or decrease, the value of a business: risk, profitability and growth.
Take for example a recent client. We determined the valuation of the business to be about $1 million.
We then illustrated that if they were able to incrementally decrease risk, improve profitability and accelerate growth, they would be able to realize as much as $300,000, or 30% of additional value.
- Decrease risk (discount rate) 2 pts: +$80,000
- Increase profitability 10%: +$100,000
- Increase annual growth 2 pts per year: +$120,000
Now, will this client be able to realize the full $300,000 in incremental value? It really depends on the timeframe and level of effort that they want to put into improvements. It is a good idea to identify the range of opportunities and then prioritize activities.
Generally speaking, decreasing risk is easier than increasing profitability. And for mature businesses, increasing profitability is easier than achieving high growth rates. Here are some things to think about when assessing your opportunities:
Risk:
- Do your top five customers comprise more than 10% of sales?
- Are you dependent upon just a few suppliers? Are they in good financial health?
- Could your business successfully operate without you or other key employee(s)?
- How loyal are your customers?
Profitability:
- Are your gross margins and expenses in-line with the industry?
- Are you operating as efficiently as possible?
- Would your customer base absorb a price increase?
- Is there an opportunity to decrease costs from suppliers?
Growth:
- Is there a market to grow your business?
- Do you have the capacity to grow?
- Can you expand your service offering or hours of operation?
- Are there other channels through which you could sell your products?
Execute some “easy hits” and start to see the value of your business grow.
Develop plans to mitigate risk, which might include widening your customer base, diversifying suppliers, training your successor and cross-training others on staff.
Benchmark your performance against others in the industry and develop a plan that has your business operating at the top quartile of your peer group within a year or two.
If you are wanting to transition your business in 3 – 5 years, consider growth strategies which are consistent with your desired risk and profitability targets.
If you would like assistance increasing the value of your business, please give me a call. I would be happy to help.
If you have questions relating to business valuation, Kelly Deis, CVA, CEPA and President of Soundpoint Consulting, a business valuation and consulting firm specializing in business valuations, exit planning, strategy and operations business consulting, and financial services for marital dissolutions, would welcome inquiries. Kelly Deis can be reached at 206.842.4922, or kelly@soundpointbusinessconsulting.com
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices