What Makes up the Value of Your Business?

Jun 13, 2022 | News Letters | 0 comments

 

Understanding what makes up business value will help the business owners run their businesses so that it not only generates the income they need but also maximize the business’s value at exit.  Business value is comprised of tangible assets and intangible assets.

Tangible assets are those assets that we typically think of when we are looking at our income statement and balance sheet.  For example, company size, EBITDA (cash flow), growth rate, margins, etc.

Then there are intangible assets.  Intangible assets are those things that drive intrinsic value into your business and in today’s business environment, intangible assets contribute 80 to 85% of the business value.

Intangible assets can be categorized into four areas or four Cs as we like to call them, where C stands for capital. The four Cs are Human Capital, Customer Capital, Structure Capital, and Social Capital.

Human capital looks at two related points.  First, how dependent is the business on you (the owner)?  Can the business run equally well or better if you are not there?  Second, how well does your management team run the business?  What are their talents and competencies?  What about their experience and tenure?  What about their knowledge of the market and relationships with customers?

Customer capital considers how dependent is your business on a few key clients.  Are the clients heavily dependent on the business owner?  What percent of your revenues is repeat business? Is there client “stickiness” or is it easy for them to switch to a different supplier?

Structure capital addresses the development and sophistication of your processes and systems and whether they are well documented.  Is it easy for a newcomer to understand how work gets done or are the processes and procedures in the heads of different individuals?  Well-defined and documented processes make the business more transferable and in turn more valuable.

Social capital revolves around the culture of the company and how well employees are aligned with the company’s purpose and strategy.  Employee alignment is a key factor in the success of any company and therefore it makes the business more attractive and more valuable to a buyer.

Improving the intangible assets will also result in improving the tangible assets like growth, margins, etc.

Accelerating the business value growth is a major aspect of exit planning.

 

 

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