Value Drivers are the key elements that either build or protect the value of the business that the owner has worked so hard to create. They determine the current and future value and saleability of the business and will dramatically affect how your business is perceived by potential buyers.
If a sale of your business isn't on your horizon for 5-7 years, focus on those elements of the business that will provide the most impact on its future value.
If you are considering selling your business within a shorter time frame, focus on the factors that will yield the greatest impact over that shorter term.
Consider the simplest business of all – an owner-operator starting up a new business. He or she is a one-man show – chief cook and bottle washer. Primary responsibilities include the gittins – 'gittin it in', 'gittin it out', and 'gittin paid'. Those are the owner's Value Drivers. Or, to put it in conventional terms: Sales & Marketing, Operations, and Finance & Administration. Every ounce of effort goes into these three functions. Then, as the business grows, the owner will hire others, and thereby add Management to the Value Drivers of the business.
The owner started with a strategic vision for the business, choosing a particular industry and considering various risk factors. The owner's financial objective is to maximize business value, balancing that with the need and desire to draw funds from the company for personal use.
Identifying and managing Value Drivers helps business owners focus their attention on the specific and measurable key activities that are the most likely to meet their objective of increasing business value over time.
The typical Buyer of a small business has three main financial motivations that he or she looks for in a prospective business:
A prospective Buyer has innumerable investment opportunities that satisfy these needs. If you are a business owner contemplating a sale, why should a prospective Buyer consider your business?
Buyers pay for the past, but buy for the future.
A prospective Buyer's decision-making process will certainly consider critical success factors such as competitors and their respective market shares, industry regulations, environmental issues, and the general economic conditions affecting the underlying business operations.
The analysis will consider the type of business and industry, the size of the company, its market share and growth trend, its profitability, the terms of sale, and many other factors.
A Buyer's Due Diligence will confirm the veracity of the historical conditions of the business to be assured that those conditions will be likely to continue into the future with the new owner at the helm. Thus assured, Buyers purchase a business for its anticipated future cash flow and its potential increase in value.
However, buyers believe other attributes are important and will either reduce their risk or increase their return. Businesses have a greater value when they have the following characteristics:
To identify the Value Drivers on which to focus, owners must address two key questions:
Having identified and prioritized those factors that will have the most impact on future business value and saleability, it remains to convert this understanding into an integrated business system that the owner, managers, and employees can use to monitor progress towards the intended goal.
A baseline must be established against which to measure performance. However, in running a business, it's all too easy to get sidetracked onto the measurement of factors that aren't going to have a long term impact on business value. It's important to keep focused on the Value Drivers that are most likely to increase business value in the shortest possible time.
Each business has certain key activities that directly impact progress towards this goal and are most critical to its success. We call them Key Performance Indicators (KPIs) – these are the activities to track.
A simple sales pipeline for outside sales agents, for example, consists of prospective customers progressing from Target Market to Contacted Lead to Appointment to Sale. Measuring the conversion rate from one step to the next will allow both the agents and the company to strategize ways to improve on those rates. Similar KPIs should be developed for key facets of sales, production, or administration – in any department where quantifying results can reveal problems, suggest solutions, and provide a better understanding of the business.
Value Drivers can be generic, industry-specific, or organization-specific. The following are generic to every business:
Business Fundamentals include those factors that reduce your exposure to risk of loss. We look to that first – before we work to increase business value, we want to make sure that mechanisms are in place to protect that buildup of business value.
Strategy is the overall game plan, while tactics are the means used to realize an objective. Strategic Planning considers the means by which business value will be increased through a realistic growth strategy.
A common denominator of top companies is that they systematize Internal Operations. They perform tasks the same way, every time. Buyers attach great value to systems that will produce consistent results. Creating systems should be at the heart of what you do every day.
Successful business owners use Financial Measurement & Management to ensure that day-to-day activities enhance their strategic planning efforts. Trying to build business value without specific financial goals usually results in a less efficient path to success. Performance goals and limits provide the framework for successful operations and a more valuable business.
The best products and services, innovative systems, and state-of-the-art facilities don't ensure success. People do. There are various means by which owners can Leverage Human Relations to improve the productivity, efficiency, and quality of their employees to build business value.
Achieving a higher business value requires a constant focus on critical elements of success. One of the key activities on which any business owner should focus his or her attention is Benchmarking & Measuring Success – it dramatically increases your ability to achieve your goals for growing business value.
Contact us to receive a visual assessment that indicates the Value Drivers you need to address in your business: Value Drivers Assessment.
To learn more about Value Drivers: