Contents
“Your value will not be what you know; it will be what you share.”
Ginni Rometty
Valuation
“98% of small business owners don’t know what their business is worth” according to IBIS World. With a significant number of business owners admitting their retirement wealth is tied up in their business, this is a shocking statistic.
Most retirement planning is undertaken over many years, so it is logical to plan the extraction of your retirement wealth from your business. Knowing how much your business is worth throughout its life cycle is a good measure not only of your retirement funds but also of the business performance beyond profitability.
Add in the statistic that over 50% of all business owners leave their business through events that are unexpected and unplanned, such as death, disease, and disability, and you have another good reason to know your value.
There are four myths most common as to why a business owner hasn’t had their business valued:
- It’s expensive
- It takes too much time
- It’s complicated
- There’s no need for me to have one
Most business owners only get a formal valuation when they absolutely have to. Often this is when they are under pressure from other, unplanned events such as divorce, exit or in need of funding. Yet the truth is that a valuation is a useful exercise to undertake on a regular basis.
A business valuation can help ensure you are on track to meet your personal and business goals.
For most small and medium size companies, it’s the business owner’s largest financial asset, yet without knowing it’s value, they have no idea of their overall net worth. Are you measuring your income and dividends and making up a business value in your head? How realistic is that number?
To debunk some myths about valuation:
- It doesn’t have to be expensive, typically less than £10,000 (depending on the size and complexity of the business).
- It’s quick, especially if you have good financial governance and produce your annual accounts promptly.
- It’s simple because a valuation is based on information you already have to produce as a company.
An indicative valuation and appraisal of your financial numbers gives you insight into your overall performance – and in some cases can benchmark you against others in your industry.
If something were to happen to you, do you have protection for your income or have your mortgage payments covered? Do you have enough, if any, protection relating to your businesses’ full worth? If the worst happens, and we know this does more often than not, will you leave your family exposed to the financial impact? Especially when they are at their least able to respond. A business valuation is helpful when risk assessing the financial needs of your family should you be unable to continue to run your business.
Avoiding valuing the business is effectively sticking your head in the sand rather than facing the reality of your future wealth. There are two magic numbers you need to be able to make effective decisions on your business:
- How much do I need for my retirement?
- What does my business give me to funding it?
Regularly valuing your business means avoiding unpleasant surprises in the future. Knowledge leads to better decision making when planning for the future of your business, such as when to sell or even if to sell.
A valuation report also helps you gain a deeper insight into how your business is positioned and performing, helping you identify and prioritise ways to improve your business.
Business Benchmarking
How good is your business really? As a business owner you want to think you are the best in your industry – but how do you know whether you compare favourably with other businesses? And does it matter?
Anyone looking to buy your business compares you to the industry leaders and best practice – so it’s worth knowing what they are going to find out about you. When was the last time you actually benchmarked your business? Or even looked at comparisons within different areas of your business? It’s all benchmarking.
“An investment in knowledge pays the best interest.”
Benjamin Franklin
Is your business excelling and you are not aware? Or struggling and needs some extra guidance to realizeise that there’s more ways out there to do better? The objective of benchmarking is to understand and evaluate the current position of your organisation in relation to best practice and to identify areas and means of performance improvement.
Benchmarking against best practices is a great way of testing your assumptions and developing better practices within your business.
“An investment in knowledge pays the best interest.” Benjamin Franklin
Using experience, you can objectively look at activities that led to successful outcomes and what needs to happen to replicate this in the future.
Benchmarking involves four key steps:
- Understand what’s happening NOW in your business.
- Analyse what others are doing (or not doing).
- Compare your “now” with the analysis.
- Take action to close the performance gap.
Benchmarking should not be a one-off exercise. It’s an ongoing improvement process to allow your business to keep developing and testing what’s best practice. Benchmarks are great, but they’re only useful if they are:
- Accurate
- Relevant
- Followed with appropriate actions
For example, if you looked at average customer order value between industry sectors, you’d see that for eCommerce beauty stores, in 2018, it was $70.71. It’s not going to compare favourably to the average order value in travel ($375.05) for example – but that doesn’t mean it’s bad. If the benchmark isn’t relevant to you or your business, then it’s not helpful in any way. Knowing what’s relevant is key.
Benchmarking is an opportunity to identify strengths. It’s also a chance to critically appraise areas for improvement. Testing your assumptions means you ask, “is there a better way?”
Just seeing what other businesses are doing opens your business to new ideas – new ways of doing things, what to stop doing and what to start. As with all knowledge, the real power is in the action taken.
Understanding of the value of knowing benchmarks
Benchmarking has the potential to be a powerful tool in the development of a culture of continuous improvements in your business. If you rely on only internal measures, you risk limiting your perspective. High performing companies strive to identify and improve processes, product and services that are important to their customers.
Evaluating your efficiency and effectiveness against others who lead your industry or who innovate in other sectors leads to a step change in performance.
There are many different types of benchmarking:
- Strategic: looks at core competencies, developing new products and services, and changes in the external environment. This is long-term thinking and actions may be difficult to implement. The focus is re-aligning business strategies that have become inappropriate or irrelevant.
- Performance or Competitive: utilises data analysis through trade associations or third parties to protect confidentiality. This allows you to assess performance in key areas or activities in comparison with others and finding ways of closing gaps in performance.
- Process Benchmarking: focusing on processes and operations by seeking out best practice organisations that perform similar work or deliver similar services helps identify improvements in key processes to obtain quick benefits.
- Functional Benchmarking: where there are no specific or easy comparisons, looking at business sectors and areas of activity is a great way of improving similar functions or work processes, leading to innovation and significant improvements.
- Internal Benchmarking: assessing operations from within the same organisation, for example business units in different locations or countries can lead to quicker and easier implementation. Many a team or business has got to the top by using 1% increases in performance.
- External Benchmarking: is analysis of outside organi-sations that are known to be the best in class. Learning from those who lead the field is an opportunity to reflect and move the business forward. It takes time and resources. The credibility of the findings relies on having comparable data and appropriate information. It’s a good way to develop an action plan.
It’s important to take care of who you compare yourselves to. A big company may be aspirational in terms of turnover, but they may very well be inefficient as a result of their size. Critical analysis is key.
How to find out where do your business sits in your industry
Are you drinking your own Kool-Aidcool-ade? If you are preoccupied with your own business, you easily lose sight of competitors and innovations across your industry. Keeping a finger on the pulse of the changing demands of customers means you are more prepared for change in general and maybe positively ahead of the curve.
Looking outside your own industry for the best-in-class performance of specific processes, services or approaches challenges your assumptions and tests your business practices.
For example, Southwest Airlines famously analysed Formula 1 racing pit crews to improve their airplane turn-around time at the gate. The outcome? Southwest reconfigured its gate maintenance, cleaning, and customer loading operations, and has saved the company millions of dollars per year. This made it consistently profitable when most airlines were barely breaking even.
Improving your customer service, for example, may result from comparison of processes and key performance indicators of successful competitors or shining lights in other industries. By identifying differences, you can start improving processes to strengthen your performance.
For example, Pal’s Sudden Service is a small hamburger and hot dog chain and is so successful at achieving best-in-class performance for drive-thru and overall restaurant operations, that it has opened an educational institute to train other organizations. Many companies in the fast-food market use Pal’s as a best-in-class benchmark for their own operations.
McDonald’’s has its own University university for serving and business management – and according to the press, it’s harder to get into than Oxford or Cambridge! (Source: The Daily Mirror newspaper; 25th October 2015).
Note: Trade associations often publish comparative data invaluable to the benchmarking process.
How investors look at your business
Any investor or potential buyer compares your business to others – they look for opportunities to add value. Do you have great practices in your business that they can apply to other businesses they are invested in?
A buyer wants to understand how you are positioned in the market to assess your relative value. Benchmarking uses financial or numeric data because it’s most commonly available. Use of statistics such as the number of employees, floor space utilised, total equipment or assets help to understanding your business efficiency. Many of these measures of efficiency don’t stand out from your management accounts.
Non-Financial Risks To Your Business
The value of your business is more than just the numbers. It also considers the way your business operates.
Whilst PROFIT is an important part of the value of a business, it is only one of a multitude of factors that buyers consider when acquiring a company. Putting yourself into the buyer’s shoes is a good start. This allows you to understand the areas of your business that add a genuine, material return on investment.
Anyone looking at your business wants clarity and comfort for what they’re investing in, lending to, or buying. Thinking like a buyer means you know what activity maximises the value of the business. This makes you and the business prepared to achieve a successful exit. Giving priority to the issues that are extreme or urgent and resolving them quickly means you are reducing the risks. You are protecting the value of your business.
Actions = VALUE
Implementation takes time and effort. It is why most business owners don’t take the necessary actions. After all, if it was easy everyone would be doing it. Not acting diminishes the value of their business as a result.
But where do you start?
Identifying which levers to pull to change the value of the business results in increased value if those levers are actually pulled. When action is taken, it’s not unusual to see the value of the business increased by 20%, 30% and even 40% or 50%.
The non-financial KPI’s looks at 5 key areas of the business:
- Governance
- Strategy and planning
- People
- Financial management and reporting
- Risk management
It is improvement in these areas that positively impact the “multiple” and make for a much more attractive investment for buyers. Changing the performance of the non-financials invariably leads to improved profitability as a by-product.
This means work here is a win-win.
Some non-financial questions you need to answer are:
- Are you legally up to date with HMRC and other requirements?
- Do you have a strategic plan that’s documented and acted upon?
- Do your people have the right skills and roles (and paid accordingly)?
- Have you got the right financial reporting in place to make decisions?
- How do you address risk management, such as bBusiness continuity plans and iInsurance?
Acquirers look at what you’ve done as an owner to address these issues. Anything that’s missing makes a buyer look in more depth at your business and put you on the back foot during the sale process. These factors ADD VALUE!
Making sure you are legally up to date AND do not have a trail of past misdemeanours shows a buyer that you’ve been running a professional company and reduces the worry factor when the due diligence process starts.
Having a strategic plan that everyone can understand and buy into brings your team together. It allows everyone to see the long-term goals and work towards them. This leads to more teamwork, better efficiency, and a happier place to work. A strategic plan removes uncertainty and gives clarity on the targets and direction the company is going in.
People make better decisions faster when they have a road map.
Having a strategic plan also allows for reduced reliance on the business owner. This one action alone adds huge value to the business. Side benefits are usually reduced business owner stress, great team coherence and improved efficiency and performance. Happy staff lead to happy customers, leading to greater profitability and easier customer retention.
Are you stuck in the day-to-day of your business with no time to plan for the future? A Professional Business Mentor is just the leverage you need to get out of the rut and flying. Discover how you can make your business worth more AND avoid leaving money on the table when you finally leave your business. Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses exit ready so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.