Accountants tend to focus on the financial analysis when valuing a business. There is an argument that it’s actually not the most important area in determining Business Value. You do need to get a good understanding of how the business is performing. Use of financial analysis tool shows a snapshot of the financial performance and the areas for improvement.
For the true value of your business focus is needed on measurements that are relevant to your business. It is important to know the key financial drivers. Performance indicators allow you can step in and make improvements. This is of course crucial when you are preparing your business for sale. The potential buyer will look at the financial performance of your business. As well as how well you manage the financial data, and how quickly you act on key financial indicators to improve performance.
What Measures Add Business Value?
Governance:
Anyone looking to invest in or acquire your business will want to know that you have good governance. They will ask:
- Do you have a formal board structure?
- Are you legally compliant?
- Do you have a competent management team
Strategy and Planning:
Having a business plan shows any potential acquirer that you know where the business is heading and the actions required to get it there. An ownership and management succession plan is further evidence that the business is not going to be heavily reliant on the current owners in the future. Evidence of core values that are a part of the fabric of your business will attract a buyer with similar values. This increases business value.
People:
Beyond the need to show that as a business owner you are taking your legal responsibilities seriously and fully compliant, they will be concerned about the skills, loyalty and capabilities of your staff. When your team has job descriptions and defined roles, it is evidence that the business has a structure that extends beyond the limits of the current business owners.
Financial:
Part of the due diligence process includes analysis of the financial status of the business. Disclosure of the management accounts, budgets and cashflow all form part of that analysis. Without these documents it makes assessing the business value more challenging. This means they are taking more risk and this will lower the price they are willing to pay.
Risk Management:
When a business has given enough thought to processes to document them, this reduces the perceived risk to potential acquirers. A business continuity plan is something often put off by businesses because it is deemed difficult. Like processes and procedures, it’s hard to get started but worth the effort.
Mitigating risk with legal agreements and insurance will pay dividends in the event of unplanned activities. It’s the hard work now that makes everything in the future easier. Adding business value is a side-effect.
