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Beyond Numbers: How Do Non-Financial Metrics Shape a Business’s Valuation?

Business Value Acceleration

Beyond Numbers: How Do Non-Financial Metrics Shape a Business’s Valuation?

By , June 20, 2024

Non-financial metrics can significantly impact business valuation, often influencing the perceived value of a company beyond what is evident from financial statements. Many of these, such as brand reputation, can be classified as non-financial assets.

They’re the ‘secret sauce’ encompassing various qualitative and operational aspects, rather than physical, saleable assets.

Non-financial elements are usually core to the business and cannot easily be separated from it for value extraction. They don’t fit neatly in accounting software tables — being measured differently than sales, profits, liabilities and turnover — but non-financial assets have a sizeable impact on business valuation.

Brand Strength and Reputation

A well-known and well-liked brand enjoys the benefits of customer loyalty, a higher likelihood of client referrals, an established active market, and a reputation that can help justify premium pricing. These are all examples of intangible assets that contribute significantly to a company’s value.

So, how do you gauge your brand reputation? For a start, a simple way is to look at the aggregate score from online business reviews — both positive and negative. It’s not going to be as detailed as the information you’ll get from a consumer research study, but these still hold weight for a buyer, as future customers in the market also make choices based on these reviews.

Brand strength goes beyond name recognition to include the world of positive affiliations that customers have for your offering. Distinctive brand assets such as trademarked logos, fonts, colours and sonic brands or jingles, are part of your recognition arsenal that ensures your business is instantly recalled by customers.

While being held in high regard alone won’t ensure consistent revenue on your balance sheet, that hard-won good reputation can enhance customer trust and market positioning.

Customer Satisfaction and Loyalty

High customer satisfaction and loyalty levels usually lead to repeat business, lower customer acquisition costs, and stable revenue streams. Many businesses pride themselves on customer service, or claim to be customer-centric, but fail to quantify this usually qualitative metric, which is not derived from a contractual claim like financial assets.

If your budget doesn’t allow for large-scale surveying of the general market, you may benefit from regularly seeking feedback through customer surveys. The question, “How likely would you be to recommend us to a friend or colleague,” is so common in surveys because it says so much about customer sentiment and informs your NPS, or net promoter score.

If you don’t already use a CMS (Customer Management System), setting one up can provide many benefits like the ability to track returning customers to deliver a higher quality of service, as well as re-marketing to those who’ve already chosen your business once and are more likely to again.

A customer loyalty programme can be as simple or complex as you require. The simplest, such as a “10th Coffee Free” reward card may not provide a whole lot of instantly accessible first-party data. However, collecting these on redemption, with a name and email once they’re complete can give some indication of how many brand-loyal customers are coming through your door every month.

Market Position and Competitive Advantage

A dominant market position or a unique competitive advantage (such as proprietary technology or exclusive partnerships or services) can signify long-term profitability and growth potential. Intellectual Property, such as patents, also hold significant financial value and should be protected as such, much like financial assets.

If a buyer were considering your business or your nearest competitor, how might you articulate your provable points of difference; the ones so strong they stir deep envy in your enemy’s office? In cases of a competitor buyout or acquisition, these are the gold that they’re most interested in.

That includes your market share and strategy to reach your target audiences with goods and services. Software vendors, for example, might look to have their products ranked on platforms like G2, to identify where they sit in the market of comparable offerings.

Lastly, keeping records of your marketing and PR initiatives can help demonstrate to an investor or buyer the ‘share of mind’ that your brand holds in the market, that is, how often are those who might choose your business being reminded that your brand should be their first choice.

Quality Management, Talent, and Culture

“Our people are our greatest asset” has become something of a cliche in business circles. When it comes to valuations, having skilled management in place and a talented workforce is crucial for operational efficiency, innovation, and strategic execution, contributing significantly to the physical net worth of the company.

A thriving, positive workplace culture is also attractive to investors, whereas high attrition rates are a risk to a business’ long-term success. According to a Gallup study, 50% of employees have left a job to “get away from their manager at some point in their career.” Skilled senior management on the other hand attracts high-quality talent, further contributing to sustainable growth on the balance sheet.

Becoming an employer of choice doesn’t happen overnight, which is what makes having that reputation so valuable to a potential business buyer.

Corporate Governance

Effective governance drives ethical business practices, reduce risks, and enhance productivity.

Good practices include establishing a competent and independent board of directors and advisors, maintaining accurate and timely financial reporting, implementing robust risk management procedures, and fostering an ethical corporate culture.

Effective governance involves managing both produced and non-produced assets, such as physical asset such as natural resources and marketable operating leases, to ensure comprehensive asset management. It also means a clear delineation of roles and responsibilities within the organisation, which enhances accountability and decision-making efficiency.

Many potential buyers, such as private capital firms are ‘hands off investors’ who are likely to value companies higher if they have confidence in the management’s ability to make sound decisions and manage risks. A strong track record from the board can even potentially lower the cost of acquiring capital to grow the business.

On the other hand, poor governance might lead to regulatory non-compliance, quality control issues, liability claims, fines or sanctions, all of which would impact the company’s financial health, reputation and culture.

Valuation Effect of Good Governance

Investors may assign a higher value to businesses with robust governance and positive cultures, as these factors reduce risk and improve sustainability. Unlike tangible assets, which include land, buildings, motor vehicles, and equipment, good governance and positive culture are intangible yet crucial for long-term success.

By implementing strong governance practices, such as regular internal audits and a culture of continuous improvement, the company reduces the risk of fines and sanctions and can enhance a company’s reputation, making a business more attractive to cautious investors.

Sustainability and Social Responsibility

While ‘sustainability’ is often used as a synonym for environmental impact in corporate communications, it means far more than your carbon offset program. Authentic, actionable ESG or CSR policies can help mitigate regulatory risks – which is especially important to those whose exit plan is weighted towards an acquisition by an exchange-listed company.

Sustainability also talks to how well the business is going to perform in the long run. Those that exhaust natural water resources or their people, and breach their social licence to operate may do so for short-term profits at the expense of long-term success.

Operational Efficiencies as non financial assets

Efficient operations can lead to lower costs, higher margins, and more effective use of resources. Operational efficiency is often achieved through changing systems, such as implementing or enhancing your Enterprise Resource Planning (ERP) software to better manage produced assets and cash flows. Efficiency gains can also be made through practical changes, such as locating the business near freight links, finding ways to reduce product wastage, or streamlining customer service management.

Innovation Capability and Intellectual Property

The ability to innovate can determine a company’s future competitiveness and potential to tap into new markets or create new revenue streams. Those with a track record of research & development breakthroughs are more likely to have the systems and resources to continue to not only lead the market but create new ones. While the IP generated has quantifiable value, the capabilities to innovate are a non-financial asset that is also worthy of attention.

Supplier Relationships and Contractual Claims

Not just a ‘nice to have’ in business, strong relationships have real economic benefits, including being able to negotiate favourable contract terms, demonstrate stable revenue streams, and greater stability in operations and supply chains.

Take, for example, a business that provides clients a service or products on an ad hoc basis. This may leave them open to market shocks, and greater volatility, compared to those that have regularly renewing contracts. Exclusive supplier contracts can give a potential buyer greater certainty around turnover expectations, and the banks more certainty in lending capital to the operation, where physical assets for secured debt may fall short.

Summary of valuing non-tangible assets

While financial assets are crucial for a company’s valuation, it’s easy to see how a plethora of non-financial metrics can significantly affect a business’s valuation, bringing economic benefits.

Your profit & loss statements, financial assets and liabilities, as well as financial non-produced assets, such as NMR of natural resources, leases, licenses, patents, and transferrable contracts, all add value based on their inherent worth.

Yet, while the sale or acquisition of liquid assets of a business is often looked at through a financial lens, it’s the non-financial factors that often provide a more holistic view of a company’s health and prospects.

Savvy investors will be looking at your balance sheet and market sentiment, but they are just as interested in the magic behind the organisation and seek out businesses that have adopted a long-term, strategic approach to a thriving business.

Scoring highly on any of these above non-financial factors shows the business has the foundational stability to undergo an ownership change. Whereas say, issues with corporate culture, can raise a red flag that buying into the organisation may be more of a headache than it’s worth.

If you want to get the whole picture of your business’s value, ask Succession Plus about beginning your journey toward a successful owner exit with a detailed Business Insights Report. Uncover the hidden factors that can enhance your business valuation and make your exit strategy a success.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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