Every business owner preparing for an exit wants the answer to two key questions: How much would I get for my business now, and what would it take to increase that value so that my financial goals are met?
To answer these questions, you have to look at the myriad of factors that are driving value in your business. These value drivers are aspects of your business that, if improved, would increase its value to a potential buyer and, as a result, expand your options and the likelihood that you have an optimal outcome that attains your goals.
There are 8 value drivers that create a positive impact on your company’s value:
Value Driver 1: Next-Level Management
This is the most important value driver for your business for several reasons:
- Next-level managers tend to be the people who run the business after you leave it.
- Next-level managers reduce your responsibilities within the business, which often means the business doesn’t rely on your presence to operate and succeed on a day-to-day basis. Thus allowing more time for you to work ON the business.
- Next-level managers are likely going to be the people who work on improving the other value drivers.
Finding next-level managers can be challenging, but it’s not impossible. You may need to bring in people from the outside, or you may have next-level managers within your company right now. Though just identifying the right people for the right seats is the first step. The ultimate success of any next-level management team is developing a culture of shared vision, accountability, honesty and collaboration, all supported by the foundation of a sound business operating system.
Value Driver 2: Operating Systems That Improve Cash Flow Sustainability
Sustainable cash flow is a key indicator of the strength of your business. One blind spot that business owners sometimes have is determining whether the business’s cash flow is sustainable without you.
Having systems that allow your business to run well whether you are there or not is an attractive component to many buyers, and how these systems look will likely be as unique as your business itself. A fractional CFO can help you identify gaps in your company’s systems and then design a strategic plan that allows you to find the right people to implement the right systems to encourage sustainable cash flow, whether you are running the business day-to-day or not.
Value Driver 3: Diversified Customer Base
Diversification is an important risk management strategy. Having a diverse customer base can help your company weather difficult times and reduce the likelihood that losing one major customer will harm the business. A risk that all potential buyers would evaluate.
There are several ways to diversify your customer base. You may consider offering products and services to a new market, or you may decide to market your current products and services to new audiences.
Regardless of the strategy, positioning your company’s cash flow so that it doesn’t rely on one or a few major accounts could make your business more attractive to potential buyers.
Value Driver 4: Proven Growth Strategy
Buyers of small and midsize businesses typically look for businesses that can demonstrate a history of solid growth, and that growth can be maintained after the sale. These companies will command a significant value premium compared to ones required turn-around restructuring.
Once again, it’s important to determine whether your business’s growth is a function of your presence, and this is where a fractional CFO can provide tremendous value, helping you understand the key performance indicators of your business and how you play a role in achieving your company’s goals. A fractional CFO can also create a strategic road map for sustainable growth that can help you determine how to remove yourself from critical operations and, as a result, add more value to your business.
Value Driver 5: Recurring Revenue That Is Sustainable and Resistant to Commoditization
If you’re like most business owners, you likely believe that no one can do precisely what your business does. This confidence is essential to starting and growing your business. However, when planning for a successful future, it’s important to be objective about whether your products and services could be commoditized.
Market research may be one strategy to determine how your clients and prospects view your business. You may also discover that you need to adjust your products and services to avoid an impending commoditization of your core offerings. Regardless of your approach, identifying ways to resist commoditization can help your business stand out to potential buyers.
Value Driver 6: Good and Improving Cash Flow
The idea that companies with good top-line growth tend to be more valuable may seem self-evident. However, without experienced financial guidance and management growth can often be a torpedo to cash flow. Negatively impacting business value.
Growth can often require material investment well in advance of the expected future increase in revenue. And, even with that growth in revenue, without careful management, ongoing operating expenses tend to also increase in anticipation – and often well in advance – of that growth. Thus, resulting in high top-line revenue but with reduced net operating margins. I.e., decreased cash flow. This decreased cash flow is often compounded by a lack of scalable accounting practices which becomes all too evident with an increase in accounts receivable balances and days outstanding. Further reducing cash flow.
This is where a fractional CFO can add tremendous value, proactively planning for that growth with cash flow forecasts, enhanced policies and processes, and strong management.
Value Driver 7: Demonstrated Scalability
Similar to the above, showing that your business’s processes are scalable as the business grows is an additional strength that may attract more buyers.
It’s not uncommon to reach a plateau in terms of the business’s scalability. For instance, you may have a business that has a strong local or regional presence. But you don’t have the resources, time, or desire to grow it any bigger.
There’s nothing wrong with this mindset. However, showing buyers that your business has the potential to expand its market and has the potential scalability to support that growth will make it more attractive to buyers.
This is another instance in which a strategic roadmap based on key performance indicators and viable financial data can provide tremendous value, clearly communicating a path to future growth. The CFO can also work on the operational side of the business, helping to document and improve key processes that would lead to increased scalability of the business. A fractional CFO can work with you to create this roadmap and ensure your business is moving forward with intention and purpose.
Value Driver 8: Competitive Advantage
A business that has a unique differentiator tends to stand out among the competition. If you can offer potential buyers a unique competitive advantage, it may increase the value of their business for them. This, in turn, could help you reach your financial security goals when you eventually sell your business.
At FocusCFO, we specialize in providing small to midsize businesses with seasoned and experienced fractional CFOs that can also serve as embedded CEPAs, helping you create value for your business now and in the future, as you prepare for a potential exit. To find out more about how we can support your business, schedule a consult today!
