Do your clients understand what makes their business valuable and how to unlock value when they sell?
Small businesses employ over 61.2 million employees, accounting for roughly 46.8% of all employees in the United States of America, according to the U.S. Small Business Administration. Additionally, small businesses make up 99.9% of all private establishments in the United States.
However, according to the Bureau of Labor Statistics, 50% of small businesses fail after five years. What causes these businesses to fail? More importantly, how can understanding business value help turn them into significant companies? The success of small businesses not only benefits the owner, but the communities they support, the people they employ and the consumers they serve.
The Importance Of A Business Valuation
Conducting an annual business valuation will help determine what factors to focus on when accelerating the value of a business. A valuation highlights areas of risk, shows what improvements have been made to the business, and helps ensure the business owner’s goals are being met.
Even if a business owner is not planning on exiting their business anytime soon, a business valuation to identify key risks in their company is still a crucial step to take. Without first identifying the baseline business value, your clients have no understanding of what metrics need improving, the strength of the company’s intangible capitals, or if the business is as valuable as your client might think it is.
The Four Intangible Capitals
Intangible capitals make up roughly 80% of a company’s value. Without understanding the strengths and weaknesses of the intangible capital of a business, you face the risk of leaving value on the table as you guide your clients through a business exit.
Human capital is the value of the talent that is in a company. The value of your company increases based on multiple factors, including the mixture of talent, experience, resilience and motivation of your team. All things being equal, the stronger the company’s human capital, the more value the market is going to place on the company. Strong companies believe accountability to each other is more important than to their boss or company.
Customer capital is a measure of the strength of relationships with a company’s best customers. Deep, integrated, tenured relationships, recurring revenue, contractual relationships, and diversified customer bases all contribute to strong customer capital. The best-in-class companies regularly analyze profitability by customer and product.
Structural capital is the back-end infrastructure of the company such as processes, financials, strategies, information technology, patents, and other intellectual property (IP). It is the documented know-how and know-what of the company that positions you to be fast and flexible. Structural Capital connects people to knowledge so it can be shared to enable a business to scale.
Social capital, or company culture, embraces the people. Social Capital is what elevates a company to be best-in-class and is the optimization of the other three capitals. How they communicate, what they believe in, and how they operate internally and externally are key components of a company’s culture. It is also shown in how your company contributes to its community. Social intelligence is one of the greatest predictors for success.
Attractiveness And Readiness Assessments
Often, business owners are extremely tied to their businesses and can be too close to the situation to see the negatives. As an exit planning advisor, your role is to help owners understand the valuation of their business and guide them on how to build a more valuable company.
Business attractiveness and exit readiness are not the same things. Business attractiveness asks the question, “how attractive is your business in the eyes of a buyer?” Whereas exit readiness asks the question, “how ready are you and the business to transition?”
To a business owner, complications are simply a part of the business and not an area for improvement that their customers need. This is where understanding exit readiness and business attractiveness come into play.
Just because a client’s business scored highly on business attractiveness does not mean the owner is personally ready to exit the business. Similarly, if your client is personally ready to exit their business, it does not automatically mean the business is attractive to buyers.
Once you can help a client assess their business value, you can help them to accelerate their business valuation and better align their personal, business and financial goals. By improving business value today, owners prepare their businesses for success when they ultimately decide to exit.
Scott Snider is the president of Exit Planning Institute and a nationally recognized industry leader, growth specialist and lifetime entrepreneur.