The Australian economy is embarking on an eager comeback which has led to new highs in business confidence and M&A activity. Investors have cash to spend, and Australian businesses that have shown resilience are in the limelight.
Acquirers are assessing the risk and opportunities in businesses and paying a premium for companies that have the right value drivers.
So, what are the characteristics that are so attractive in the eyes of acquirers? And how can you drive up the value of your company in 2021 and beyond?
Here are 5 strategies that will help future-proof your business and increase your business valuation:
1. Be clear on your personal goals
Where do you want to be in life?
Where are you now?
How will your business be the vehicle to help you achieve your life goals?
Don’t underestimate the power of your personal goals when it comes to driving up the value of your company. They should always be first and foremost in your mind. You’ll want to ask yourself whether you still see yourself in the business in 1 year, 3 years or 5 years. Then, what is the next step in your life after that? Perhaps you want to retire, pass on the reins to the next generation, or maybe you want to step out of the ‘day to day’ and sit on the Board. While your exit plan may not be top of your agenda now, take the time to look ahead and assess your options. In doing so, you will then be able to work backwards, creating a plan for your transition.
An exit plan will have a dramatic impact on your company, lifestyle, and financial freedom in the future.
2. Benchmarking your business
This is an activity that helps you, as a business owner, get clear on what your business is worth today, and what steps you need to take to increase business value. Your company value should be your true measurement of company performance. Just in the same way that the share market tells investors whether the value of a public company has increased or decreased.
A benchmark valuation looks at all the financial and non-financial elements of a business, and then determines what factors are driving up or inhibiting business value. It will compare your business to your industry peers, so you have perspective around your current performance, and how that compares to others in your industry. The deep insights in a benchmark valuation will help you add real value to your company.
3. Improve your cash flow
The key to resilience and growth is having an ease of access to funds. This all boils down to one important thing: Cash flow. Good cash flow is one of the most important aspects of any business, regardless of size. Yet only 7% of businesses go on to become large businesses and at least 30% fail, all because of cash flow.
4. Make yourself redundant
When everything and everyone is relying on you, this is known as the Owner’s Trap. It’s a precarious place to be. Think of the reasons you started your business: The freedom of escaping a 9 - 5 life. Yet, think of where you are now. Can your business operate without you? Do your customers call you up whenever you have a problem? This could actually be driving down the value of your business.
In fact, in a study of over 55,000 businesses, companies, where the customer doesn’t know the owner at all, receive offers around 55% more than if the owner was predominant in the day-to-day running of the business.
This is because when you build a business that operates without you, you’ve:
Developed a solid management system that can operate autonomously, giving you time to work on your business rather than for it.
Promoted a level of independence for yourself to explore your next steps without having to worry about the status of your business, and;
Created a business that’s turnkey for the next owner when it comes time to sell. They’ll be able to come in and pick up where you left off without an arduous transition period that could stall growth.
5. Build recurring revenue
Do you rely on returning customers to turn a profit? Or maybe it’s upselling your products and services? The traditional business model is based on one-off transactions which may not be beneficial to your long-term success in 2021 and beyond. What makes recurring revenue so valuable?
It offers businesses:
- Predictability & stability
- Ability to forecast future income
- Reduced risk & ability to scale
All these work in conjunction to drive up the value of your business.
Acquirers pay a premium for the predictability of the income because forward-looking revenue models are powerful. The benefits of planning your growth knowing that you have the income to support it, and the ability to learn much more about your customers and their behaviours will enable you to calculate your Customer Lifetime Value (CLV) - these factors combine to reduce risk, something that is very appealing to investors.
When it comes to increasing the value of your business you need to keep these strategies in mind. Understand your personal goals, know what your company is worth, develop healthy cash flow management, make yourself redundant and develop models of predictable, recurring income. A powerful approach is to put yourself in the shoes of an acquirer and look at your business through their eyes - even if you are not planning to sell or exit anytime soon.
This information is provided solely for general information purposes and is not intended as professional advice. Readers should not act on the information contained therein without proper advice from a suitably qualified professional.
We expressly disclaim all liability for any loss or damage to any person or organisation for the consequences of anything done or omitted to be done by any such person relying on the contents of this information.