Beauty is in the eyes of the beholder, so what makes an attractive and valuable business?
Based on hundreds of years of collective professional experience gained working with owner managers and owner managed businesses, and supported by company research, Haines Watts has boiled the answer down to the interplay between two basic factors:
- Quantity of Profits (how much) – demonstrated by financial performance
- Quality of Profits (how good) – demonstrated by operational factors
Putting it simply, Attractiveness (or Value) = Quantity of Profits x Quality of Profits.
When reviewing a company, much emphasis is placed on quantity of profits, however, any business can be made to look more pro table in the short-term if it’s starved of future investment. Hence, factors which provide a solid foundation for ongoing profitability and drive quality of pro ts also need to be considered.
In the quoted company world, financial analysts continually evaluate the equivalent of quality of profits to identify attractive investments and estimate price to earnings (P/E) ratios for valuation purposes. This formal set up doesn’t exist in the owner managed world, however, the underlying principles still apply and are linked to the profit multiple used when evaluating a company sale, acquisition or investment.
A high quality of profits is directly linked to a high pro t multiple and indicates a well-run business which in addition to being inherently valuable is attractive in terms of:
- Winning and retaining customers
- Recruiting and retaining employees
- Raising finance
Though it’s frequently quoted – and we agree – you should run your company every day as if you were going to sell it tomorrow, this isn’t to say you should batten down the hatches and save every penny, but rather you should invest at the right level in the right things to create value.
This begs the question, “what are the best investments to make to drive value?” particularly when there are always plenty of competing ways of investing resources and/or money.
To address this question, Haines Watts has developed a process to assess and then improve the quality of pro ts of owner managed companies, by making prioritised business decisions and investments.
Depending on the individual company situation, an initial assessment takes about a day and covers 25-30 key factors, grouped into 6 areas. Based on over 100 evaluations to date, the process works effectively and of the 6 evaluation areas, a good starting point is reviewing dependence on:
- Products & services
- People, especially owners
If you’d be interested in assessing or improving the attractiveness and value of your company please contact Chris Lonergan Head of Business Performance Improvement on 01604 746760