Eight key drivers to value a business
Many business owners of system integration, automation, or engineering consulting firms find themselves beyond busy every day, yet they may not see the business results they are looking for. It’s especially frustrating when these results are inconsistent with industry trends.
Successful business owners generally rely on a variety of managerial frameworks to help them make sure they are on track with strategic plans and implementation. The following framework can be used to set strategic direction to drive value in the business and can guide business owners and the team to follow through when making day-to-day business decisions.
Eight key drivers of value
The following are eight key drivers and examples of questions associated with each driver of value.
1. Financial performance: The history of producing revenue and profit combined with the professionalism of your record keeping.
Questions: Am I promoting the right services at my firm, at the right prices, in order to get to the profits needed? Do my accounting practices reflect the overall level of professionalism in my business?
2. Growth potential: The likelihood to grow the business in the future and at what rate.
Questions: Is my company keeping up with industry trends in terms of process, products, pricing, and quality of employees?
3. Switzerland structure: The business’s dependency on any one employee, customer, or supplier.
Questions: Do I rely so heavily on one employee, customer, or supplier that without them I would put the business at significant risk?
4. Valuation teeter totter: Whether the business is a cash suck or a cash spigot.
Questions: Am I creating sufficient cash flows to support day-to-day needs of the business?
5. Recurring revenue: The proportion and quality of automatic, annuity-based revenue collected each month.
Questions: How can I create consistent cash flows with recurring orders versus starting from scratch each month?
6. Monopoly control: How well is the business differentiated from the other competitors in the industry.
Questions: What is the "why," or reason my company exists, and how am I delivering on that in a way that my competitors can’t or won’t?
7. Customer satisfaction: The likelihood that customers will re-purchase and also provide referrals.
Questions: How have I trained and empowered my employees to handle customer complaints or share customer praise to make sure we are doing the right things and making it right when we fall short?
8. Hub and spoke: How would the business perform if a key employee were unexpectedly unable to work for a period of 3 months?
Questions: How am I creating advancement paths to retain key employees for their best interest but also so that the business is not as dependent on me daily?
The eight key drivers of value help guide business strategy and day-to-day decisions. Start by listing each of these drivers, then add bullet points for the types of decisions you and your team make that fall within each category (see the examples below). Don’t worry at this point how much each driver may impact value, just try to include at least three topics within each that may contribute, either positively or negatively, to value. Next, discuss it with the team and determine what changes need to be made and what impact these changes may have versus the resources it would take to implement.
Once the list is made, you can even turn this into a dashboard and have the management team report back on a monthly basis to track progress and use it to set clear priorities.
This framework begins to illustrate how much more goes into the value of a company than simply the financials and should spark some ideas on what questions need to be asked to help focus on the value drivers of the business. Identifying and discussing these topics are critical to driving value in the business.
What areas of the business could benefit from a pricing review? What process adjustments could help the business operate more smoothly? What services are offered, or could be offered, that would create a recurring revenue stream through a subscription-type model or at least create more repeat customers?
Sometimes the best ways to get fresh ideas for a business is to look at entirely different industries. For the next month, as products and services are purchased either personally or professionally, pay close attention to the details of the experience pre- and post-purchase. Make notes of anything that stands out, whether positive or negative, then take a few minutes each week to look at the list and see what parallels there are to your business.
These daily experiences can often provide a fresh perspective to things that may, or may not, be happening in your own business. If you don’t see a parallel at first, challenge yourself to look at it through your customer’s eyes. Chances are you will identify multiple new ideas that could help you progress against your goals within the eight key drivers of value.
Whether you are considering selling your business in the near future or not for years to come, it’s never too soon to start thinking about ways to drive value for the best possible outcome when that day comes. After all, your business is your investment as well as your job. Drive value.
Catherine J. Durham is accredited senior analyst, principal, and president, Capital Valuation Group; edited by Emily Guenther, associate content manager, Control Engineering, CFE Media, firstname.lastname@example.org.
- The eight key ways to drive business value.
- Questions to ask when considering each key business driver.
- The framework to use to drive more value to a business.
What types of questions should be asked for businesses within a certain industry?
Coming soon: A link to part 7 in the Business Valuation Article Series will be offered below.