My goal is to debunk that commonly-held belief.
Improving revenues and profitability will increase value, but not maximize it. For that, we need to look elsewhere. Namely to intangible assets, or goodwill.
If you are a business owner who would like to receive a premium price on the sale or transfer of your business, then it would behoove you to focus on the intangible characteristics that make your company stand out from your competition. And when I say competition, I am not just talking about other companies that provide similar products and services – I am talking about the unprecedented number of privately-held companies that will be transitioning ownership over the next decade and a half.
The rapidly increasing role that intangible assets play in business valuations is well documented in the research paper published by the Chartered Institute of Management Accountants in November 2015 titled, The Digital Finance Imperative: Measure and Manage What Matters Next. According to their research, the top five value drivers ranked in descending order of importance by the nearly 800 survey respondents were (not surprisingly): Customer Satisfaction, Quality of Business Processes, Customer Relationships, Quality of People (human capital), and Brand Reputation. These five intangible characteristics are highly correlated predictive indicators of future financial performance – clarity and confidence in forward-looking results translate to the lowest risk profile available and therefore by extension the highest value possible.
Having a good grasp on the intangible qualities that make your company stand out from your completion also helps you tell a compelling story about the future of your business, which is what an acquirer is buying – the future potential of the business, not its past performance.
The challenge, of course, lies in the ability to gather and evaluate the data necessary to measure changes in the company’s intangible assets, and to tie those changes to future financial outcomes of the organization. A non-trivial task. But if approached properly from a strategic, multi-disciplinary point of view, it is an effort worth engaging in. As any meaningful progress made in the company’s ability to improve its most important assets, promises to yield a much higher enterprise value than efforts which focus solely on producing short-term improvements in revenues and profitability.
Because the creation of value in today’s economy is increasingly dependent on non-financial business drivers – my advice is simple. In the years leading up to your transition, regularly ask yourself how much goodwill are you creating. The answer to that question is everything.
If your company is high performing (relative to your competition) in the areas of Customer Satisfaction, Quality of Business Processes, Customer Relationships, Quality of People (human capital), and Brand Reputation then you are on track to enjoy an above average valuation on your exit.
If you are not able to demonstrate your company’s capabilities to develop its intangible assets, I worry the exit you dream of will remain just that – a dream.