Value drivers are anything that differentiates a business from its competitors in a positive way. In the mergers and acquisition’s world, a value driver is a factor that makes one business or company more valuable than the next business or company. The greatest benefit of a value driver is that it provides a competitive advantage to a business, giving that business an upper hand in its industry. Value drivers can come in many forms, such as superior brand awareness or revolutionary technology.
Below we discuss five of the key value drivers:
Financial performance is one of the most important value drivers for a business. If a business has strong revenues and strong profitability these factors will positively impact on the value of that business. The financial performance of a business is not only limited to profitability, and is also measured by factors like the strength of a business’ cash flow, which is also an important value driver. If a business does not have strong financial performance, it is often difficult for other value drivers to make up the gap in value caused by the poor level of financial performance, demonstrating why financial performance is such an important value driver.
Access to Capital
Capital comes in many forms and includes cash flow from the business’ sales and other revenues. It can also come from cash injections from the owner’s personal savings and investments. Securing lines of credit with banks and other lenders also plays an important part in stabilising your business’ finances and building your business’ capacity to grow and achieve its goals. A business’ ability to grow, and hence increase in value is often closely aligned to that business’ ability to tap into capital, hence this is a key value driver for all businesses.
Economies of Scale
As production output increases, businesses typically achieve lower costs per unit. Whether through quantity discounts or spreading capacity costs over higher volumes, larger businesses possess distinct advantages in certain operations and markets. Larger businesses in the market that are scalable or have achieved economies of scale are generally valued at a premium in the market than smaller businesses.
Having a customer base that is solid and widespread is important for the continuing viability of a business. When businesses grow and flourish by only providing service to their largest customers they become very risky, diminishing their value. Businesses need to manage the distribution of customer concentration to minimise the risk of losing a substantial source of revenues, and businesses that manage this well are valued at a premium.
A business’ employees are the heart of an organisation. Key value drivers include the knowledge, skills, experience, training, and creative abilities employees bring to a business and the health of its company culture. Having staff with these attributes ensures that the business help to ensure the effectiveness of production and service delivery, accordingly increasing valuations.
Quinn M&A’s expert team of business valuation advisors can assist you to with all aspects of the business valuation process. Contact Quinn M&A today on +612 9223 9166 or submit an Express Enquiry to arrange a confidential no-cost consultation with one of our Senior Advisors.