There are 8 Drivers of Business Value. You can see how your business stacks up against these 8 drivers by taking the Value Builder Assessment. These are the major factors that come into play when an acquirer is looking at your business to purchase. If you focus on increasing your scores in each of these 8 factors when growing your business, you will have a valuable and transferable business.
The 8 Drivers of Business Value are:
Financial Performance
This is your businesses history of producing revenue and profit, combined with the professionalism of your record keeping. Size does matter when it comes to financial performance, but it is not the only factor when it comes to financial performance. Another major factor is the quality of the reporting of these numbers. So to drive up your score here, not only focus on top line and bottom line, but consider investing in an audit, or some other way to make sure those numbers are defendable as possible.
Growth Potential
Your likelihood to grow your business in the future and at what rate. Why do people care about growth potential? Well, think of an acquirer for a second. For most entrepreneurs, you know, we think of the end, the exit, as sort of, the last mile of a marathon. You can just get willing your body across the finish line, but if you put yourself in the shoes of an acquirer, it’s actually their start line.
They’re going to buy your business for a million, 10 million, a hundred million. It doesn’t matter, but that’s their start line. What they want to know is that your company has legs, that it can grow quickly beyond what you’ve achieved. We’re all looking in the rear-view mirror as entrepreneurs, we want to be evaluated and what we’ve done in the past, how much profit we generate, how much revenue we generate, how many awards we won, how many employees we’ve recruited, the locations we built, all the past tense things.
And while those are good and important things that acquirers look at, they’re also going to want to know, how can I take this business from what I’m buying it for and make a return. For them, it’s their starting line. They want to understand your growth potential and one of the questions we ask on the Value Builder Score questionnaire to evaluate it is used as a way to ascertain or quantify your growth potential. No matter how much they have paid to acquire your business, they want to know how it can grow beyond what you have achieved and how can they make a return on the investment.
Switzerland Structure
How dependent your business is on any one employee, customer, or supplier. What drives the owners metric. Companies that have an independent structure, in other words, they’re not dependent on a single customer, so they’ve got good diversity among their customer base. And they’re not overly relying on a single employee and not overly reliant on a single supplier. So, they don’t have platform risk. Those three elements make up the Switzerland structure. So, you want to make sure you’re independent of any one of those constituencies.
Valuation Seesaw
Whether your business is a cash suck or a cash spigot. When an acquirer purchases your business, they need to write two checks. One check to you, the owner. The second check is to fund your business’ working capital. This is the money your business needs in order to operate the day you hand over the keys. The deal is, the buyer has to write those two checks out of the same checkbook. So the more your company sucks up cash, the more cash it needs to operate, the less they are going to be willing to buy your business. To improve your score on this driver, make sure your company is really driving cash generation.
Recurring Revenue
The proportion and quality of automatic, annuity-based revenue you collect each month. When entrepreneurs think of recurring revenue, they think of SaaS (Software as a Service) companies, media companies, and maybe membership websites. For most business owners, they think recurring revenue does not apply as they may be a retail business, a manufacturing company, distribution company etc. when in reality, there are many different ways businesses can incorporate a recurring revenue strategy into their business. There are at least 9 different models, and more if you combine different ones!
Monopoly Control
How well differentiated your business is from competitors in your industry. Investors from Warren Buffet on down, look for companies with a deep and side competitive moat that gives you pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control. Companies with a monopoly in their market, the ones that are truly differentiated, they get 50% higher offers. The biggest reason for this is that acquirers buy things that they cannot easily replicate. Monopoly control is a score, not a concept.
Customer Satisfaction
The likelihood that your customers will re-purchase and also refer you. The Net Promoter Score asks the question “On a scale of zero to ten, how likely are you to recommend us to a friend or family member?” Understanding your net promoter score:
Group your respondents into 1 of 3 categories
- PROMOTERS SCORE 9-10
- PASSIVES SCORE 7-8
- DETRACTORS 0-6 (People who will recommend that others NOT buy from you)
Those people who give you a nine or ten are your promoters; your passives are the people who give you a seven or eight and your detractors are the people who give you a zero through six.
To figure out your Net Promoter Score, take your percentage of Promoters – in this hypothetical example 25% and subtract your percentage of Detractors, in this case 5% and you would be left with a Net Promoter Score of 20%
The average NPS is 15%
It’s highly predictive that your customers are going to repurchase from you, and that are going to refer you. That’s why it’s so important as a leading indicator of the value of your company.
Hub & Spoke
How your business would perform if you were unexpectedly unable to work for a period of three months. We see the average multiple in this data subset who received offers to these users in the value builder questionnaires was 3.76, but that varies dramatically based on how these business owners answered a very simple question, which is, tell me about the relationship you have with your customers.
The business owners who say I know each of my customers by first name, which on the surface sounds like a good thing. While you may be delivering a great customer experience, if you know all of your customers by first name, you probably have a very limited valuation because it means that your company is deeply dependent on you as the Rainmaker for your business. Contrast that with those entrepreneurs who say, I don’t really know any of my customers personally, and I rarely get involved in serving an individual customer. Those businesses are trading at almost double the business where they know each of the customers by first name.
The owners trap is where you become heavily relied upon to sell and deliver your products and services. You may start out as the primary salesperson, interacting with the customer directly. Because you are the main salesperson, you are able to satisfy any additional requests that the customer has due to your deep level of expertise in the business. This easily can push the business to offer too many products or services. This variety of offerings often becomes only deliverable through your direct involvement as the owner. When you are directly involved in the delivery of these products or services then the customer becomes accustomed to interacting with you and starts to expect it.
Some signs you’ve fallen into the trap are:
- business slows when you take a vacation
- customers come to you with problems
- your growth has reached a plateau
Not only are businesses stuck in the owner’s trap stressful to run, they’re also worth significantly less than they could be because few people are going to buy a company that is dependent on its owner.
The Value Builder Score
At this point, I imagine you may be wondering if this program really works. We’ve studied more than 55,000 business owners who have used our system and found the average value builder score is 59 and those average businesses receive acquisition offers of 3.5 times pre-tax profit.
And as you can see by this chart, those businesses achieve a score of 90 or greater on average are getting offers of 7.1 times. Pre-tax profit more than double the average performing business. So, working on these eight factors, I’m going to talk about today. It’s not just theory. It has a material impact on the value of your business.
Not only that, but it also has a material impact on the likelihood that you will get an offer to buy your company.
Getting to a score of 90 also means you are almost three times more likely to receive an unsolicited written offer for your business.
Now you may be saying, well, I don’t want to sell fair enough. But getting unsolicited offers puts you in the cat bird seat, right? You’re in control. You can bat away the offers and say, not now not interested and watch them increase over time. Or you can choose to engage with an acquire. If you want on your terms with leverage, that’s the benefit of having a high value builder score, having people coming to you, as opposed to you going hat in hand to them.
There’s nothing that gives you more control — and negotiating leverage — than being courted.