The most important person NOT on your Board – your Investor19.8.2020
Every business owner has an opinion on the value of what they have created. The basis for this valuation can vary wildly; from independent valuations done by an accountant, to asset value, to listed trading multiples or reported transactions multiples as comparisons, all the way to what you’ve heard through word of mouth, “Joe sold his business for a multiple of five times”. However, the opinion that is rarely at the front of mind of the owner, and all that matters at the end of the day, is the value that an investor is prepared to pay.
Similarly, when Shareholders, Executives and Boards gather to set the direction for the future of their business, questions commonly asked may be:
- What size / scale are we looking to achieve?
- What markets should we be in, stay in, or enter?
- Should we expand our product offering?
- How do we increase our revenue / margin / profit?
While these are all good questions, the question that is not asked enough is, what are future investors going to value?
If you plan to sell your business in the future, or raise capital to grow (whether equity or debt), it is important to think about your business from a potential investor’s perspective:
- What are investors in businesses like us looking for?
- How will they value our business?
- What parts of the business are more / less attractive to a potential investor?
- What risks in the business reduce our valuation?
- What growth opportunities increase our valuation, and how do we get credit for these?
- What is our timeframe, and how does this align with the timing of an investor?
We see a lot of founders building their business without an exit strategy or a thought for who may eventually acquire the business. Not only may this limit the pool of potential investors and increase the risk profile of the business, but the future value of the business may be eroded significantly.
While not always the easiest thing to do when focused on the day to day of running of the business, examining value through an investor’s lens can provide a more objective view and help shape your strategy. In the long term, this will help you to maximise the value for your business, and the likelihood you can exit on favorable terms. In the short term, instilling best practice will likely create value for the existing stakeholders as well.
So the next time your leadership get together to plan the future, make sure you ask yourself; what is an investor looking for in a business like this? And if you want to know how to answer that question, ask InterFinancial about their Strategic Options Analysis Process.