Hundreds of everyday actions affect the performance of your business, whether you are negotiating a sale, recruiting a new employee or complaining to a supplier. Much of the working day is spent reacting to circumstances, making small decisions that have a limited, short-term impact.
In contrast, creating a valuable business is about taking strategic decisions that have a lasting effect. Unsurprisingly, this is easier said than done. But for many directors, particularly those who own a share of the business, it must be the ultimate aim.
This briefing outlines:
- How growth and security contribute to a valuable business.
- The major opportunities for creating and increasing value.
- How to protect the value of your business.
What is Value?
1.1 A valuable business typically offers growth, profitability and security.
Growth and security are covered in 2 and 3.
1.2 Creating a valuable business generally requires a medium or long-term strategy.
In the short term, creating value usually requires investment.
Short-term methods of increasing cashflow and profitability can reduce your potential for creating value in the long term.
Long-term strategies are usually riskier. Their eventual outcome is more uncertain.
If you plan to sell your business, the value will be higher if you can show a strong track record over time.
1.3 Different stakeholders may have conflicting objectives.
Some shareholders value a business that offers high, secure and gradually increasing dividends.
Other shareholders may accept more risk for higher growth potential.
Directors and employees may have their own agendas (eg generous contracts, career opportunities or job security).
The local community may value a business that is environmentally responsible, or contributes to the community in some way.
1.4 Your strategy will have a better chance of being successful if it includes measurable objectives.
These are likely to include ways of measuring the overall value of the business.
Set intermediate targets for what you aim to achieve in different areas of the business (see 4 to 7).
Include realistic timescales for the completion of these objectives.
Tying in Value
You may be able to make some of the intangible value of your business more concrete.
One way of achieving this is by building a strong order book.
Differential pricing techniques can help create advance sales.
Use contracts to protect value.
Employees’ contracts can protect confidential trade secrets, and limit their ability to set up in competition with you.
You can use long-term contracts to guarantee the supply and price of crucial materials.
Relationships can be more powerful than contracts.
A good working relationship is a better way of controlling an employee than resorting to contractual obligations.
Good customer relationships can have a more enduring effect than any sale contract.