Gerard O’ Reilly, of Crowe, shared with us the importance of creating, growing, and keeping value in your business. In this article, Gerard explains that by focusing on these three things, you will create a business that investors are eager to buy into. Gerard reviewed the concept of value and how you can create it in your business in a way that maximises what it’s worth to buyers. That way, you can be sure you’ll get the best price when you decide to sell or exit your business.
This article is a summary of one of our #BusinessGrowth webinar series. See a list of all our upcoming events to register.
So, what is value?
Value, in business terms, is what your customers believe your product or service is worth to them. The more a customer believes your product or service is worth the more likely they are to buy it or pay a premium price for it.
In highly competitive markets, creating value can be difficult. That’s why it’s important not only to create value but to hold onto it. You also want to continually create new value so your customers stick around in the long run. Keep in mind that some of today’s most successful businesses were initially unprofitable. However, by continually focusing on growing the value for their consumers they became hugely successful. With this success came profit.
Figuring out what you want from your business
Figuring out why you want to create value in your business will help focus and drive you. Some of the main reasons for creating value in a business are:
To make a profit quickly
These kinds of businesses are often called Cash Cows. While they mightn’t have much room for growth, they require little investment and can make large profits and help you create savings or invest in your assets.
To pass the business on to the next generation
This may be true for family businesses where parents want to create a successful business to pass on to their children or in the case where an entrepreneur wants to create a business which will continue even if/when they decide to retire.
To encourage a Management Buy Out (MBO)
A successful management team might be motivated to become entrepreneurs themselves. This means that if you decide to take a step back, the management team can buy into the company and will have the skills and know-how to continue to drive it forward and create new value.
To satisfy your bucket list
You might have other ambitions in life and decide that you need to be able to take a step back from your business activities to pursue them. By creating value in your business you can ensure that it continues to succeed without your constant presence.
What kind of entrepreneur are you?
In order to create value in your business, you must first decide what kind of entrepreneur you are and how you prefer to work. A good way to figure this out is by considering what your business card would say about you. We’ve broken it down into three categories.
Types of entrepreneur
A Freedom Fighter
A Craftworker
A Serial Entrepreneur
3 steps for creating value in your business
1. Identify and eliminate critical value destroyers
Critical value destroyers prevent the growth of your business and impact whether you can find any type of buyer, including family members. For example, Craftworker businesses are unlikely to sell for more than two times their profit because of critical value destroyers, such as:
Dependence on owner
If your business is dependent on you to succeed, for example because of your particular skills or your personal relationship with customers, it can be difficult for it to grow independent of you. This can alienate potential buyers. To counteract this, focus on creating a competent and skilled management team who can run the business independently of you if needs be.
Negative cashflow
This is different from profitability. A business may be profitable, but it might be necessary for most or all of these profits to be reinvested for the business to grow (for example, in new machinery). If this continues to happen the business will fail to generate cash and ultimately go out of business.
Lack of profitability
It’s difficult to incentivise investors to buy a business that isn’t making a profit. Investors need to see a reason why they should take the risk involved in buying a new business. If your business is just managing to pay the salaries of you and your employees, it’s unlikely to attract buyers.
2. Make the business attractive to competitors or management for Management Buy-Outs (MBOs)
Making your business an attractive investment for competitors or management can help create a decent valuation. A good goal price for this kind of sale is five times your profit. However, you should consider reasons to select a higher or lower valuation. To do this, your business must focus on:
Being independent of particular suppliers or customers
If your business is dependent on one customer or supplier, it can turn potential buyers off. This is because of the risk incurred if this relationship ends for whatever reason.
Constantly satisfying customers
By consistently meeting or exceeding the expectations of your customers you will create value which will encourage them to become long-term or lifetime customers. This will guarantee future business, with little involvement from the owner
Growth prospects
This refers to your businesses future ability to generate profit and expand. Many successful businesses failed to make a profit early on but were valued highly and invested in because investors could envision their future growth.
3. Create Exceptional Value
Creating exceptional value can ensure you have the basics for attracting any buyer and allow you to set a valuation of up to ten times your profits. Creating exceptional value is a long-term process. It takes time to build the kind of value buyers look for. The following aspects are key for creating exceptional value over time:
Recurring revenue
Creating sources of recurring revenue is vital in creating value and continual growth for a business. Many businesses are moving away from selling one-time products. Instead, they focus on subscription-based packages to help them achieve their full value potential. An example of this kind of business are Netflix. They moved from renting DVDs on an individual basis to charging customers a monthly subscription to access all their content.
Control of the market
Market monopolies are rare and market control can change (think of Kodak who went from having a huge share of the market for cameras to almost none in a few years). However, being the first to market with a product or service which meets a customer need can help you create market dominance which is defendable and often hard to shift.
Independence from key employees
If certain employees are overly influential with big customers, they may be your only choice for a buyer if you choose to sell. This can put you at a disadvantage when negotiating a sale price.
Completing the value generation journey
So why does it matter? By knowing what kind of entrepreneur you are and what stage you’re at on your growth journey, you can decide which steps to take to move up the value chain. To create as much value as possible, focus on making sure your business is:
Teachable
This means that your business practices can be replicated by employees or management, without your input. An example of this is McDonalds who standardise how they make their products in a way that ensures all employees can make them to the same level of quality.
Defendable
This can mean having a product or service which your competitors find difficult to copy or having a place in the market which is defendable. For example, being the company who is first to market with new customer offerings.
Predictable
This can also refer to having standardised products or practices. This offers a level of control to buyers as it means they can confidently continue operations after the sale. It can also refer to predictable sources of revenue, such as subscription customers. These kinds of customers offer long-term value to buyers.
Scalable
This refers to your company’s overall ability to grow in value without large investments, for example in new machinery. When faced with the challenge of increasing production, a scalable business can do so easily and without obstacles.
Understanding your buyer
When planning to sell, it’s important to have an idea of who your buyer is and to understand what will attract them. Some examples of buyers include:
Competitors
By creating a valuable business in a particular market, you can attract buyers from the same market whose goal is to absorb your business and the value it offers. To do so, your business should make 10-20% of the revenue that their company makes in order to make a difference to their bottom line.
Management
By focusing on creating a strong, entrepreneurially minded management team, you can create future buyers who know and understand your business enough to be able to continue to grow it even after you decide to sell.
Private equity
Partnering with a Private Equity company can be a win-win for business owners. Entrepreneurs provide the understanding of their company, while PE companies provide strategic guidance and funding. PE funding also means that business owners no longer bear all the risk involved with scaling their business. They can take some of their personal money out of the business and instead split the costs associated.
Tax Pitfalls and opportunities
It’s never too early to start thinking about tax implications when starting a business. For example, retirement relief options decrease at age intervals of 55, 65, and 70. Retirement relief is dependent on the number of shareholders and the value of your business. Each shareholder can only claim relief on their own shares, and this is capped at €750,000. If your shares are worth more than that, it may be worthwhile splitting them, for example, with a spouse so that you can both avail of tax relief.
If you have a surplus of income after your personal expenses are paid, you might consider building up a pension fund to store your money tax effectively. You might also consider the tax opportunities of buying property.
It could also be worthwhile speaking to a professional about retirement and entrepreneurial relief options. For questions about your own tax options, talk to our Client Services Team.
All of these options can be discussed with a professional accountant, and we advise you to do so to avoid falling foul of punitive tax avoidance legislation. Remember that there is a fine line between what you want, as a business owner and what will be acceptable under company and tax law.
Key takeaway?
Value is key to maximising what your business is worth.
By continually focusing on creating, growing, and keeping value in the ways outlined in this article, you will make sure that your company is attractive to buyers in the long run. This way you can make sure you get the best price possible for your business if you decide to take a step back.
Helping businesses to create value - Crowe
Crowe is a leading business advisory firm. They have been offering professional services to help their clients achieve their goals and grow for over 80 years. Business owners can join one-to-one or small group programmes to learn how to diagnose growth destroyers and overcome them. They also help businesses loosen dependence on owners or individual suppliers and advise them on obtaining funding to scale.
This article is based on our “Building Value In Your Business – Business Valuations” webinar, hosted by Crowes’ Gerard O’ Reilly. It’s part of our #BusinessGrowth series. Sign up for upcoming webinars focused on helping your business to grow.
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland and the UK.
