Value Drivers to Increase Your Business Value and Net Worth

Someday — whether it's 10 years from now or tomorrow — you’ll be ready to sell the business you’ve worked tirelessly to build so that you can have enough money to invest in your next venture or enjoy a secure retirement. So, you scramble for new clients, scratch your head to do more for your current clients, and try to limit costs enough in order to make a profit when responding to clients’ unreasonable demands and shoestring budgets.

These are all important for your business, and they’re what we all do in our respective industries. But they are NOT strategies for successful exits. They may keep you in business; they may even let you take a little more home at the end of this year than last, but they won't drive up the price you command when that future day finally arrives to monetize your years of sweat equity.

To sell your business for more tomorrow, you must focus on building its value today.

Building value requires a strategic approach to the specific metrics and characteristics that will enhance your valuation multiples, or what we call Value Drivers. The tactics for growing these Value Drivers differ depending on your industry, which is where careful thought and outside help can really pay off.

But before you even begin to think about those tactics, you need to understand five basic categories that drive value. Then, you must implement overarching strategic goals to address your weaknesses and build upon your strengths in each of the categories. Once the goals are in place, it’s time to figure out and implement the tactics for turning them into reality.

1. Financial Performance

It all begins with the numbers. No matter how great your client list, how many awards you’ve won, or how hot your geographical area is, any buyers worth their salt will start with both your P&L and Balance Sheet.

Are you making money? If you want to command a decent price when selling your business, you need to show significant profits after paying fair market salaries to the owners. How do you define significant profits? We advise our clients that 15% of AGI (Adjusted Gross Income, or fee income defined as revenues minus any pass-through expenses such as media buys) is the minimum that you should accept for yourself. If you truly want to drive up your multiple and command a higher selling price, make sure your business is hitting 20% or more.

Directly related to your profitability is your staff utilization. What is your AGI per full-time employee? If you want to look good to a potential buyer and get top dollar, strive for a minimum of $150,000. This indicates that your people are busy doing fee-generating work.

Example Value-Driving Strategy: Set a goal of improving profit margins every year with a minimum target margin to be achieved in no more than three years. Once you know what you’re shooting for, you can determine which tactics to pursue to hit that goal.

2. Growth & Sustainability

Nothing kills a prospective buyer’s assessment of your value like negative trend lines. When suitors are interested in your company, they're looking at the potential for their own future growth. If you show declining revenues or margins, they will price you accordingly. Maybe you’ll be able to build in some upside potential based on future performance improvements, but do you want the quality of your retirement to depend on your firm doing better after you’re no longer in the driver’s seat?

Your client diversification also falls under this Value Driver. You can have the greatest blue chip, marquee client in the world, but if that client represents 40% or 50% of your income, a buyer will question your sustainability. At best, you’ll be back in the scenario of having most of your payout dependent on the future performance and retention of that client.

Likewise, the longevity of your clients and a mix of retainer and project work will be scrutinized closely. While some business models, such as web development, are necessarily heavily dependent on projects, seek every opportunity you can to drive up your recurring income sources to drive up your value.

Example Value-Driving Strategy: Reduce all client concentrations to less than 10% of total AGI within two years.

3. Business Model & Services

Let’s start with the most basic business model Value Driver: Are your services in high demand?

We all know how much marketing and communications have changed in the past decade, even the past year, with no signs of slowing down. Are your business and service offerings adapting along with the times?

If your services are still the same as they were in 2005, your (depressed) value will reflect that. Buyers know what they are looking for today: true digital capabilities, social media marketing, analytics, etc. This doesn't mean that traditional services are without value, they just don’t command top dollar anymore.

The next most important driver is how you do business. In most smaller firms, the owner is the main source of new business. If that’s you, you have a problem. You don’t want to sell just so you can move from being the boss to being someone else’s employee. But you're the only one bringing in new clients, your buyer likely won't see much value unless you stay in the business.

Example Value-Driving Strategy: Train others to generate business. Set a high percentage goal for future new business to be brought in by everyone but you.

4. Brand

Marketing agenices are classic examples of the cobbler’s children who run around shoeless. Typically, they’re so busy building their clients’ brands that they hardly market themselves.

Is your business recognized in your local marketplace? Are you the top-of-mind, go-to source in your areas of vertical specialization? Are your key staff thought leaders who are publishing in trade publications and being invited to speak at conferences? Nothing drives your value in the mind of a prospective buyer more than already knowing about you before you appear as a possible acquisition.

Example Value-Driving Strategy: Make your business your top client.

5. People & Culture

Having a staff that's like a family is wonderful. Having a creative team is awesome. I’m sure you believe that about your people. The problem is, of the nearly 200 companies TobinLeff has worked with, we haven’t met one yet that doesn’t think their staff is like a family and that they have really great, creative people. Talk is cheap. Prove it.

How are your turnover rate, your average staff tenure, and your Glassdoor ratings? If your culture is truly strong, your metrics will show it.

Have you adapted to the times to attract and keep a younger workforce? Employees today are looking for flexibility in work schedules and locations. They want to be stimulated and autonomous. And competition for the good ones keeps getting harder and harder.

Similarly, it’s critical that their skills are up to date and that they have the tools they need to deliver the best services. Do you have an environment of continuous education and training? Are your software and technology cutting-edge? Build your value-driving strategy around measurable aspects of culture that demonstrate your claims and give you targets for improvement.

Example Value-Driving Strategy: Increase staff retention or reduce your turnover rate to a specified percentage.

Final Thoughts

These broadest categories of Value Drivers are only focused on high-level strategies. To truly build your future pay-out, Value Drivers must be evaluated on a granular level, strengths and weaknesses identified, and tactics implemented for long-term gain.

If you’re serious about having the best future exit possible (and everyone should be), think of this as an in-depth, multi-year process. Begin with an honest self-appraisal. At TobinLeff, we have a proprietary Value Drivers Tool for we use with clients to help assess their businesses, but you can develop one for yourself.

Then, based on the gaps you identify, undertake a full strategic planning process. For objectivity and fresh perspective, it’s always better to do this with an external facilitator, when possible. This is not a generic strategic plan, however, but rather one that is driven by Value Drivers and the end goal of increasing your agency value.

At the end of the process, you should have a simple roadmap that lays out broad strategic goals and accompanying tactics for the next three or so years. Each tactic should be measurable, with specific people identified to take ownership and with specific dates identified for each task’s completion. You can then use this document as an ongoing gauge of your company's internal progress, much as you would compare a budget to actual financial results.

Too often, business owners are concerned that they can’t afford to take the time or spend the money to go through a process like this, let alone add new tasks to their team's already full schedule. If you fall into this category, keep in mind that strengthening your Value Drivers may increase your multiple by at least 1x. Then ask yourself the following question:

If strengthening my Value Drivers potentially means increasing the price I get for my agency by $1 million or more, can I really afford not to?