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  1. Business Sellability

    A company valuation may be required when looking to buy or sell a business, for changes in shareholding, to raise capital, loan funding or due to changes in personal circumstances. Sometimes this can be unexpected and buyers will take advantage if a quick sale is needed.  Keeping an eye on your company’s value will mean you are prepared as you will have the correct information at hand.

    Valuing a business is very subjective as people are looking for different things and have different priorities. Their interest will depend on how your business fits into their strategy which will determine how much they would be willing to pay or invest in your business. They may be looking to increase their market share, expand their geographical presence or buy out competition. A buyer may be wanting your business as a whole or to purchase only certain divisions or product lines. The circumstances around the sale of a business will have an impact on the price that is offered.

    Measuring your business value is not a once off exercise but should form part of your overall business strategy. The plans that you make in terms of introducing new products, expansion or investment in resources or equipment as well as the timing of these strategies will have an impact on value.

    Factors that buyers or investors will consider in assessing a business include:

    Business Health will include a look at both the historical performance as well as future expectations. A healthy trend over a number of years will increase value. Adjustments will be made for abnormalities or once off events. Consideration will be given to the life cycle of the business and future growth prospects.

    Stable and predictable cash flow is important as many valuations are done using the Discounted Cash Flow (DCF) method. Looking at the age and condition of equipment and whether it is properly maintained will give an indication of future investment required.

    A key consideration will be what Dependencies the business has. This may be the owner or other key personnel as the new investors will want to know that the business can continue to perform successfully. They will look at whether employment contracts are in place and whether there are any succession plans to de-risk the loss of these staff members. Other dependencies may include reliance on suppliers or customers and associated risks around this will be assessed.

    Reliable Financial Information will provide integrity to the numbers and projections put forward by the business. Investors will become uneasy if the numbers presented by the business cannot be substantiated and will require more analysis to be done or may even walk away as the risk may be too great. A clean set of accounts is an indication that the affairs of the business are up to date and reduces the risk around potential tax and litigation issues.

    Corporate Governance is an indication of how the business is managed and the basis on which decisions are made. Having solid business systems and operating procedures will increase investor confidence.

    Even though a valuation is subjective, performing your own valuation on a consistent basis is something that should be done regularly. In fact, when starting up a business you should have an exit plan in place. This may sound a little ridiculous, however, understanding what will increase the value of your company will enable you to ensure that you continue to build an asset that has value.

     

  2. Turnover is a sign of activity and all businesses want to be busy…..right?

    Most of us have difficulty in walking away from an opportunity. Not all business is good business though, and there is a point at which you need to walk away confident in the knowledge that you have done the right thing. The key to doing successful business is to ensure that you have a thorough understanding of the dynamics of your business and the way in which the various factors like materials, equipment capacities, staffing and most importantly cash interrelate. The question to ask is whether you will be able to deliver a quality product on time and at the right cost? If you don’t know the answer you need to find out before you commit.

    Working Capital

    One of the common challenges in a growing business is to fund the increased investment in working capital. Business will come to a halt if there is insufficient cash. The longer the working capital cycle is, the greater the cash requirement will be. A cash flow forecast of six to twelve months is essential and will give you a good indication of what your cash requirements will be. More importantly, it provides an early warning giving you time to put plans in place rather than being caught out by surprise.

    Capacity Constraints

    At some point the increase in Turnover will require further investment in machinery, space or staffing. Often businesses get excited by the prospect and make an upfront investment to ensure they can meet demand. Jumping the gun will leave you with an increased cost base and mounting pressure to secure sales to meet the financial commitments.

    Make sure you have done sufficient planning taking into account the sales cycles and the timing of opportunities which will have a direct impact on resources. Initial growth normally comes in bursts before there is a level of consistency. Understanding which constraints are likely to impact you and knowing when will allow you to manage around them. Developing a flexible model that allows you to change variables like volumes, prices and timing of sales is an invaluable tool in assessing the impact on resources. There are often alternatives, so consider opportunities to outsource or sub-contract work. Whilst it may not be your ideal solution and you may make less profit in the short-term it will allow you to manage your growth with the flexibility required.

    Product Mix

    Know your ‘true’ product cost and its ‘real’ contribution. People often make the mistake of only including the variable cost in assessing profitability and end up inadvertently chasing the wrong business. Costs should include a proportionate share of rent, operational, distribution and administrative costs, sales and management effort and after sales support. If the product is manufactured minimum order quantities and production volumes should be factored in.

    This is not a once off exercise as small incremental changes in costs are often absorbed without being noticed. A periodic review will give you a more objective assessment. Knowing this will help in negotiating profitable deals.

    Sales Management

    Targets and commissions that are based on sales without proper consideration of other factors could be driving the wrong behaviour. Sales staff are motivated by what they are incentivised on. If this is Turnover, then this is what they will drive and will find unique ways in order to secure a sale. This often comes with additional hidden costs or operational challenges for the business. Large deals often require large discounts – make sure that the deal is adding profit and not just Turnover. Find a commission mechanism that will empower them to negotiate a good deal for themselves as well as the business.

    Turnover and growth are essential to any business but chasing business at any cost could have a detrimental impact to your bottom line. Make sure you are doing the right business!