Non-Financial Factors that Drive Value for Privately-Held Companies

The owners of privately held companies are often focused on generating cash flow to drive a higher value for their companies. At the same time, there are non-financial factors that business owners can address to enhance the value of their company.

Although a business owner may not see a direct impact on cash flow (in comparison to revenue growth or a cost-cutting strategy), these non-financial factors could impact the risk to the company’s cash flow, which in turn impacts its value. In simple terms, the lower the risk associated with an investment in a company, the higher the value (and vice versa).

Provide Best-In-Class Customer Service

Securing a new customer may be exciting on day one, but the work doesn’t end there. There is constant pressure to keep customers happy. Therefore, every company in every industry, big or small, must put superior customer service at the top of its list if it wants to create sticky, long-term customer relationships. Stickier customer relationships create value by generating consistent, reliable revenue streams.

Without customers, businesses can’t survive. As a business owner, ask yourself the following questions to better understand your customers and the risk of losing them:

• Can your customers easily transition their business to a competitor?
• What is your customer attrition rate (i.e., how often do your customers leave and go elsewhere)?
• On average, how long have your customers bought your product/service?
• Has your customer list been growing?
• Do you have any significant customer concentration?
• Is feedback available from your customers to assess their perception of your company?
• Why do your customers choose to do business with you?

These questions may seem simple, but they can have a significant impact on the risk of a business. Therefore, if you can carve out time to regularly evaluate the reasons why customers choose your company, and work to emphasize these factors in your business model, you can reduce the risk of an investment in your business, which will increase its value. Furthermore, you may learn about what drives your customers’ behavior, offering valuable insight into your sales process.

Document Processes and Controls

How well do you think you know the “ins” and “outs” of your business? What would happen if your CFO unexpectedly quit one day? Do you understand and have you documented your business’ key processes and controls? Documenting your critical business processes can make you more efficient in onboarding new employees and position the company to absorb the negative effects of an unexpected departure of a key employee.

Documenting processes and controls is a time-intensive (and often tedious) process. If this investment of time is made, however, it can create efficiencies in the long-run and protect the company against unexpected employee departures. It also reduces the risk associated with an investment in the company, thereby increasing its value. We are able to assist with documenting processes and controls, which can reduce the related time burden for your employees.

Employee Retention

It is hard to find and keep talented employees. A simple suggestion for an owner is to review market data on compensation and benefits offered for similar jobs in the industry. If your compensation and benefits are not up to par with the industry norm, your employees may be inclined to look elsewhere for employment. In addition, an owner should also give thought as to whether the company’s culture and non-cash benefits help attract and retain employees. Examples of these items include flexible work schedules, a welcoming work environment, opportunities for advancement, challenging work, and company events (golf outings, holiday parties, family outings, etc.).

Employee retention is crucial to efficient business operations. If your employees stay with your company, it can reduce costs associated with having to continuously retrain your workforce. The time, money and energy saved in avoiding these recruiting and training costs will increase cash flow and the value of your company.  Strong employee retention reduces the risk of an investment in the company, which increases its value.

Wrapping It Up

There are many non-financial decisions that owners make every day which have a real impact on the value of their businesses. The non-financial considerations outlined above can have a real impact on increasing the value of a business without needing to increase revenue or cut costs.

Our Business Valuation Services can help identify non-financial factors that affect the overall value of your business. We also offer clients Succession Planning and Human Resources Consulting services to help business owners improve processes and efficiencies.

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