Have you ever had your business independently valued?
A significant majority (69.2%) of respondents have never had their business independently valued. The good news is that, of those that had had their business independently valued, the value was broadly as expected for 62.5% of respondents. Perhaps most interesting is that the valuation was less favourable than expected for 20.8% and more favourable than expected for only 16.7%.
The low level of respondents who had had their business independently valued is surprising and may stem from a failure to appreciate the role that an independent valuation plays not only in estimating the existing value of the business but also in highlighting those aspects of the business that may be improved in order to increase its value.
At the core of a business valuation is an assessment of the likely future returns that can be expected from the business and the risks associated with achieving those returns. Whilst the absolute size of future returns will generally be a function of external marketing and other business development activities, the risks associated with those returns can be mitigated by the implementation of many internal initiatives, such as the development of systems and processes, reviewing investment in working capital and increasing productivity by streamlining processes and staff training. These initiatives will have benefits irrespective of the level of returns achieved.
Do you have a clear understanding of what you would need to do to maximise the value of your business for sale?
Just over half of respondents (52.6%) stated that they had a clear understanding of what they would need to do to maximise the value of their business for sale. The balance of respondents either did not have a clear understanding of what was required (21.8%) or were not sure if they understood (25.6%).
The responses indicate that a significant proportion of business owners are uncertain how the value of their business is affected by factors such as:
- management of working capital;
- future earnings and growth prospects;
- diversity and quality of customer base; and
- dependency on key personnel.
With proper planning over time, appropriate strategies can implemented in respect of each of the above (and in other areas) to strengthen the business and increase its value.
The major factor that you believe could help improve the value of your business is:
Most respondents believe that the value of their business would most likely be improved by a combination of improved general economic conditions (36.7%) and having more time to develop their business (36.7%). Given that respondents could choose to give a number of responses, it is interesting to note that only 16.5% of respondents believed that obtaining professional advice would be a major contributor to increased business value.
In our experience, many business owners fail to appreciate that the value of businesses can be improved even during difficult economic times and that developing their business is not solely a function of increasing revenues and earnings.
In addition to increasing revenues and earnings, the value of a business is also greatly affected by factors such as:
- the existence and implementation of documented systems and processes, particularly with regard to customer relationship management and staff training;
- the existence of contracts or documented preferred supplier arrangements with key customers;
- the existence of a documented business plan setting out the growth objectives and growth strategies to be persued in achieving those objectives;
- simplifying corporate structures and enhancing the quality of financial data available to the managers of the business;
- reviewing working capital investment (including investment in inventory, terms of trade and trade finance arrangements with suppliers);
- considering the implementation of employee inventive schemes; and
- reducing over-dependency on key customers or staff.
We have come across many instances in which it is not until the impact of the above factors is “quantified” through the mechanism of an external review or independent valuation that business owners appreciate the influence that those factors can have on the value of their business. It is then that they can start to implement strategies aimed at improving the business.
If you had to sell your business today at its current market value, would you be happy with that price?
Less than one-third of respondents are of the view that they would be happy with the price obtained, if they had to sell their business today at its current market value. A significant number of respondents (35.9%) are unsure as to whether or not, if they had to sell their business today, they would be happy with the price obtained. A further 34% of respondents expect that they would not be happy with a price based on the current market value of their business.
Based on other responses, it would appear that most respondents believe that the price that they could obtain from selling their business could be improved to a more acceptable range either by continuing to develop that business over time or simply as a result of improving economic conditions, or (most likely) a combination of both.
In such circumstances the optimal action would be to commence planning and implementing improvements to the business immediately so as to be able to leverage the impact of those improvements during the next economic growth cycle.
Given a three to five year lead time, owners can work with their advisors to design an action plan of value improvement strategies which may focus on a number of areas including; restructuring, tax planning, building management teams, diversifying revenue streams, reviewing investment in working capital and/or closing down loss making divisions.