For many business owners, a business valuation can feel like a bit of a mystery. Is it simply a report with a number at the end? Or is there A business valuation doesn’t always land where the owner expects, and the reasons aren’t always obvious. Here’s a recent case study.
We were asked to value a client’s business, and the figure came in significantly lower than they had expected. Once we had stabilised operations, we set about investigating why.
Owner dependence
A major part of the explanation was owner dependence. The business was owned by a husband-and-wife team who had worked very hard to build it up from nothing. Because they had done so much of the work themselves, the business relied heavily on them, and that reliance was severely impacting its value. The gap was substantial, around $1.2 million, and closing it required a clear strategic plan.
Our objectives were to:
- Remove owner dependence
- Build a strong structure
- Increase profits
- Reduce debt
Our strategic business plan
We began by building an organisation and management structure that could operate independently of the owners and introduced a set of simple KPIs.
We set a daily production target, supported by lead indicators, such as the number of bookings, alongside lag indicators. Because production was driven by bookings, we knew that if we secured the target number of bookings at the required return on each one, we could hit the day’s production target. That gave us a dependable way to lift profitability to where it needed to be, and the business soon began returning more profit than the owners were spending on salary and wages.
That opened up new options. The owners could now grow the business and the structure around it, placing key people into key roles in finance, administration and operational management. Gradually, they grew themselves out of the day-to-day, hands-on work.
The results so far
We have just begun the process of revaluing the business, and the picture looks very different. Profitability has improved substantially, and the business has grown by about 30% in two years. Importantly, it has grown profitably. It now has cash in the bank and is investing in its own growth using its own funds. We expect a positive valuation outcome.
By taking a focused, simple approach to how the business was built, we were able to close the gap substantially, in a short period of time.
To hear more on this topic, David Young, business valuation specialist, discusses owner dependence and how it affects business valuations.
Please don’t hesitate to reach out to our team if you have any questions or to find out how we can help you grow your business.
