Driving shareholder value and maximizing the valuation of your company should be a priority to all executives as you plan out your growth strategy for the new year. Whether you're a small business looking to sell in the future or a venture backed startup planning your next capital raise, your financial projections and growth strategy should be aligned with key fundamentals that increase the valuation of your business.
With the New Year approaching, many business owners are building out their financial budgets and financial projections for 2020, It is important to pay attention to these five (5) components to insure your are maximizing the value of your company every step of the way.
1. Revenue Growth
Whether your company is selling a service or selling a product, it is important that you are actually selling something of value. One way to determine this is to understand your revenue growth rate and metrics associated with growth (i.e recurring revenue or repeat customers, churn rate, average deal size, revenue sources, net new customers, etc.)
Are you growing faster or slower than the competition? Revenue growth is an important KPI that many acquirers look at first when analyzing your business. If you’re not growing, you’re dying and no one pays a premium for a dying business.
Revenue is important but don’t sacrifice margins to inflate your revenue growth. You are not in business to give away your products or services, you are in business to make money. Pricing your product or service correctly is crucial in order to drive gross margins (gross margin = revenue minus all costs directly incurred to deliver services) that allow your business to scale. Neglecting the importance of gross margins, or incorrectly stating gross margins is one of the most common financial mistakes I've seen majority of business leaders make.
You should always be tracking your company’s margins and benchmarking them against comparable companies. Strong businesses understand the importance of maximizing gross margin, correlating revenue growth with EBITDA margins, and projecting future cash flow in order to maximize their valuation in competitive market.
3. Customer Concentration
Customers are not only important to your growth, but they are important to your acquirers. Potential acquires will analyze revenue per customer to understand customer concentration risk (this is if your largest customer(s) left tomorrow, where will your business stand?). A diverse customer base allows acquires to analyze the opportunities for cross-selling, up-selling and the value to them in acquiring your company. It is great to have a Fortune 100 client, but if they are 80% of your revenue you need to start planning on ways to decrease your customer concentration risk without decreasing revenue in the process.
What makes your company stand out from competitors in the market? Are your processes better and more efficient than your competitors, which is why you have been able to achieve strong gross margins? Do you have a diverse blue chip customer base that acquires would love the opportunity to tap into? Do you have IP, software or brand name recognition that is not easily replicated or creates high barriers to entry? These are just a few intangibles that acquires look to when valuing your company. Why are you better than your competitors, or better yet ask yourself “Why would someone buy my company over my competitors?” Value creation comes in many forms and sometimes it isn’t all about revenue.
Taking on debt can be crucial for businesses to deliver strong growth, but understanding the terms and how you put that capital to work is even more crucial. Leveraging your company without a strategy could kill your ability to drive growth in the future. Debt isn't bad, but you need to understand how this may effect the fundamentals of your business if your growth projections are off.
No one wants to acquire a company that is insolvent (current liabilities are higher than your current assets). Having a clean balance sheet provides confidence to an acquirer that you've efficiently ran the business and can continue to drive value if they were to provide growth capital. It shows you are in a position of strength and not weakness when negotiating with acquirers and a crucial component to increasing your value.