How to identify key value drivers for your business
December 7, 2020
By: Steve Tafaro, Advisor at BluWave
In working closely with founders and CEOs during various points of their “company growth journey,” what I’ve learned is—no matter your size or industry—creating value should be the foremost priority. Why? Because the ability to do so is a company’s greatest asset. Ultimately, the question leaders need to answer is “What is actually driving value?” Beyond that, understanding which metrics can potentially increase corporate value, then building upon them, in turn may lead to a higher valuation if and when that company wants to sell.
Over the years, I’ve developed a solid collection of key value drivers that can differentiate a company from its competitors, and make the company more appealing to potential buyers:
#1—Continuous revenue growth: The ability to increase revenue with existing customers by efficiently managing current contracts and securing long-term contracts, contract renewals, and upgrades, drives significant value. The more predictable the recurring revenue is, the more value it will generate.
#2—Sales growth: The continued ability to grow sales with new accounts (i.e. “bookings”) is a strong leading indicator of revenue, and one of the most important metrics for value accretion.
#3—Profit margins: Gross and operating profit margins that consistently exceed industry averages will command higher values.
#4—Management team: Good management teams are hard to assemble and even harder to keep together. The depth, quality, experience, past success, and tenure of the management team are positive value indicators.
#5—Reliable financial controls and business systems: Reliable financial controls and systems used to generate revenue, control expenses, track customers and manage the delivery of products and services, are safeguards for a company’s assets and positive contributors to business continuity.
#6—Branding: Marketing is measured by customers’ response to a company’s products and/or services. Strong branding will improve company sales through increased market share and mindshare.
#7—Little concentration risk: A diversified customer base is essential for the ongoing viability of a business. Companies that focus on their largest customers run the risk of concentrating a great a percentage of revenues with too few customers. If one customer is more than 10% of revenue or if 5-10% of customers account for 25% there is concentration risk and thus a negative indicator
#8—Proprietary products or services: A product or service that is unique to a customer segment, or one that is clearly differentiated, will always drive more value.
#9—Product mix and diversification of gross profit: Multiple products or services and the diversity of contribution to gross profit lowers inherent risk.
#10—Multiple industries: Services sold to multiple industries (with industry diversification) will justify a higher value because each industry represents a specific growth potential.
#11—Market niche: Having a definable leadership position and a clear competitive advantage in an industry niche is favorable for companies looking for a potential exit.
All of these aforementioned attributes are important for companies that want to understand the what in terms of potential value drivers. Stay tuned for next month’s insights into the how for driving value.
As always, BluWave is here to assist company leaders, CEOs, and PE funds across a variety of functional and resource areas that drive growth. Please get in touch if there is anything we can do to help you!