While many factors can increase business value, Size, Growth and Profitability reign supreme
Over the years I have consulted with a myriad of business owners who want to maximize the value of their business. In order to discover options for growing value I perform a comprehensive business review to explore all of the different levers they can pull to increase the value of their business. For most businesses there are multiple strategies can improve their value. I call them “value drivers”. The value drivers may include everything from making the business easy to transfer to new ownership to improving the actual workspace and location of the business. There are usually over a dozen relevant value drivers for any given business. The most important metrics are sustainable profitability and revenue growth.
"Some of you are already muttering to yourself that this is rather obvious. Why would I bother even writing about it? I agree, it should be obvious."
Some of you are already muttering to yourself that this is rather obvious. Why would I bother even writing about it? I agree, it should be obvious. Yet, I constantly encounter businesses that are too busy delivering products and putting out fires to focus any attention on a sustainable growth strategy. It is the classic tale of working in the business rather than on the business. It is easy to focus your efforts on maintaining a paycheck rather than identifying strategies for future growth. We all understand that growth is needed, but every day we decide to step over the dollars and pick up the pennies.
It is also important to recognize that all growth is not equal. For example, if the activity that drives the growth is difficult to transfer, it accomplishes very little by the way of driving value. If, on the other hand, the growth is transferable and provides a strategic growth advantage for the prospective buyer (ie it provides a natural product extension, expanded client base or other benefit) it can increase value exponentially.
I would encourage you to take a step back and think about what a successful growth strategy looks like. Is there low-hanging fruit that you are not harvesting? Is there a strategic growth path that will make you more attractive to outside buyers? Is the growth sustainable over a period of years?
Experienced investors will discount short-term growth patterns. At minimum you need to be able to document a 2-year growth trend. Ideally you and document a 3- to 5-year trend.
How much growth do you need? It depends. In the manufacturing industry, 3-5% annual growth may be considered healthy, whereas in the high-tech industry it would likely be considered abysmal.
There are other significant value drivers that should be a part of every exit plan. We will discuss other value drivers in future blog posts. Even providing growth will not add value if other key processes are unattractive. With all other things being equal, however, growth is king.