Three Criteria For Business Value

www.maxellconsulting.com.au

Three Factors That Create Value How do you increase the value of

your business?

Mike Williams – Maxell Consulting



What is the value of a business?

• What is the value of an ongoing stream of interest payments:– If I was to pay you $5 each year for the rest of your life what would it be worth

to you right now?– Answer: $100

• Profits are no different to an ongoing stream of “interest payments” on a term deposit.

• Theoretically this is what value is based on – the future stream of profits or more importantly cash flow.

Investment $$$$

Profits $$$$Business Assets


What makes a business valuable?• A business model that can be transferred from

one owner to the next– Transferable

• A business model that generates cash for the owner– Viable

• Buyers!– It’s in demand!


What makes a business transferable?• A business that you own.

– Do you own the intellectual property you use?• A business that others can operate.• Systems are in place:

– Who are your suppliers?– How do you get your customers in the door?– How do you service your customers?– What business support processes are in place?– How do you manage the business?


Is this business transferable?• A business that generates income from the owner

and colleagues speaking at conferences on the specific topic:

• The social and economic implications of energy transfer between sub-atomic particles at room temperature during the hours of 1 – 4 am.

• Unlikely to be transferable.

• But ...• A business with a system for sourcing, booking,

arranging and conducting innovative guest speakers on unique dinner or function topics

• More likely to be transferable to others.


Are customers transferrable?

• You can transfer:– Customer contact details.– Contracts.– Customer buying trends, patterns and background information.

• Can you transfer relationships?– Not as a rule.– You can transfer customer relationship processes and procedures.– You can provide the opportunity for a new owner to develop those

relationships.– Strategic alliances are extremely powerful in this area – the exception

to the rule.


What makes a business viable?

• You must be meeting your obligations.– But that is not enough…

• You need to be making a profit.– But that is not enough…

• You should be making enough profit to justify the investment.– But that is not enough…

• You must be generating wealth for the owners.– That means ultimately generating more cash for the

owners.


What attracts a buyer?• Cash flow

– (cannot say this enough – cash creates demand).• Opportunities to grow:

– It’s all about cash flow.• A competitive advantage:

– All the things that your business does that makes your customers choose your business over your competitors.

• A feature your business has that other business owners want.

• A risk profile that matches the buyer’s requirements.


Our process for increasing value…#1: What is the value of your

business NOW?

What does your financial performance say about the value of your business? How does your business stack up against others in your industry?

#2: What should your business look like to get the value you

desire?

What sales, customers, profit margins and growth rates are required to justify the value you want for your business?

#3: What key factors would

help your business achieve

this value?

What strategies could you implement?


Step 1 – What are you worth now?

• If someone approached you, or you wanted to buy another business, could you answer the questions below?

$ Price

How Little Can I Get Away With Paying For This?

Default Position

How Much Can I Pay For This & Still Get A Return On My Investment?

Indifference Point

What will shift the price in your direction?


Step 1 – What are you worth now?• How do you rate your business against each of the factors

below?

1 Type of business revenue Hunting Farming

2 What is the level of profit margins in the last 2 years Low High

3 What is the trend of profit margins in the last 2 years? Decreasing Increasing

4 What level of business stabilty has been shown in the past? Unstable Stable

5 What level of business stabilty is most likely in the future? Worsening Improving

6 To what extent does the business have a competitive advantage? None exists Highly defined

7 What stage is the lifecylce of the business at relative to its market? Mature Early / Emerging

8 To what extent does the business rely on key staff? High dependanceLow dependance

9 Market Fluctuations (economy) Negative Positive

10 Asset Condition & Future Impact on Cash Flows Poor Brand New

11 Intellectual property well documented and established None existsWell defined and in place

12 Goodwill None established3 years or more goodwill


Step 2 – What should your business look like to get the value you want?

• You have decided the value you want for your business and its current value:– How do you close the gap?– How do you change your business to increase its value?

• Need to determine what should your business should look like:– You know the value you want.– What profits do you need?– What are your costs now (fixed expenses and variable costs)?– What revenues do you need to achieve?


Step 3 – What key factors will have the most impact on value?

• #1: Meeting financial goals• #2: Structured financial reports• #3: Have a bid-response ready• #4: Develop competition for your business• #5: Established & documented business systems• #6: Size of the business• #7: Well established competitive advantage• #8: Strategic alliances


Step 3 – What strategies can you implement?

• Hold onto the business and continue to grow:– Are you creating more value than you have been offered?– How do you know?

• Sell outright:– Is your business transferrable? Is it viable? Are there any buyers?– Is the offer fair and reasonable?– If it isn’t fair and reasonable – what is next?

• Expand through merger or acquisition:– How do you know if this will create value?

• Develop strategic alliances:– How will this increase the value of your business?

• Bring in investors or staff buyout:– What will you sell and for how much?

• Family succession:– How do you recoup the value tied up in the business?

• Close the doors:– Have you exhausted all the options?


How do you achieve the value you want?

• Extract sufficient dividends as you go and have only systems/brand/IP value left.

• Build value and prepare to exit

Three Criteria For Business Value

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