Are historical financial metrics the exclusive drivers of your company’s value?
Yes, if they’re all you can prove to potential investors or buyers. But what else can you show them that would potentially drive up your company’s valuation?
Small to medium sized businesses, while being the primary driving force behind the US economy, are difficult to value. Investors traditionally have relied on historical financial measures such as multiples of trailing twelve months (TTM) earnings before income taxes, depreciation and amortization (EBITDA) or discounted cash flows (DCF) of future earnings to benchmark the value of a closely held business. As you may have guessed, those valuations can leave a lot of money on the table.
As you’ve grown your business, you’ve come to rely on three things that have made you successful: your people, your customers and your ability to turn an idea into a product or service. Capitalizing on these assets is one way to break out of a straight financial valuation.
Let’s start with people. You’ve known for a long time that you have the best group of people ever. They’re hard working, intelligent and they want to help your customers. To show an investor the value of this “people asset”, you’ll need to be able to show them things like:
How you attract and retain new employees that contribute to the company in as short as time possible
How you continually improve their performance in their current job and prepare them for new jobs (with increasing responsibility) as the company grows
How you compensate your employees for performance, community involvement, etc.
How you create an atmosphere of competitive comradery where each employee challenges their peers and executive management to do the best job possible every day.
Let’s face it. You also have the best customers in the world. They’ve stuck with you through thick and thin. They’ve always worked with you to provide good profitability and you in turn listened to what they wanted and responded with high quality goods and services. But once again, how do you show this to a potential investor?
One way it to document the business processes that you built over the years to find, close and service your customers. Being able to show that your increasing revenue is the result of a clearly defined sales process and not just you or your star sales person closing the deal may increase your value dramatically. On the back end of the sale, show the investor how you continually listen to your customers and respond to their needs throughout their relationship with your company is another important value driver.
Lastly we need to address your innovation. How have you made the process of concept to product repeatable and scalable? Is it still reliant on you or a “key” employee? Is the process transferable to another company within the investors’ portfolio?
As you can see, being prepared to show value to investors can be as important as the financial performance you’ve been able to maintain. The good news is that getting a handle on these important value drives makes you a better company with or without a transaction. Your bank will be happier with more information, your customers will be happier with more consistent treatment and your employees will be happier when they understand how their job contributes to the company’s overall success.