Business values are recovering. The pandemic, that for two long years has throttled off value-added across the economy, has slipped from its perch atop the news cycle. Those that have clung to their business while staring into the abyss can surely start to plan how to recover their overall valuation in 2022 and beyond.
However, in recent months, the euphoria has dissipated somewhat. It has, alas, been replaced by an inflation crisis, a supply chain squeeze on everything from materials to people, and warnings that stagflation is a real danger for the UK economy. Add in the consequences of both Ukraine and Brexit and the recipe for increasing the value of your business faces big challenges over the coming year or two.
However, business carries on through all crises and particularly in times of strife, you as a business leader must focus your energies on one key measure - overall valuation.
At Plimsoll, we believe business intelligence should be instant and focused on the decision at hand. We facilitate this by distilling complex, cumbersome financial data on any company and providing easy to read valuation and performance analysis. We have provided such valuations for more than 40,000 clients, across 96 different countries.
During the more than three decades we have been producing business valuations, we have identified 4 “value traps” that companies often fall into. These are the common mistakes companies make that have a dampening effect on their overall value:
Too narrow a market
One of the key lessons of the past few years, for all businesses, is to avoid exposure to a very narrow market. The pandemic shuttered many industries. Those serving those shuttered industries were, in many cases, reliant solely on government support to remain in business.
COVID-19 isn’t the only harbinger of problems for companies that rely on one type of audience. The threat of a well-resourced disruptor entering your market and consolidating a huge share is omnipresent. For taxis think Uber. Video rental think Netflix. Retail think Amazon. All relatively mundane markets, often very localized that were decimated by a tech disruptor. If your business value relied on those markets, your fortunes will inevitably come under pressure.
There are many other inherent risks in being caught serving just one market. Swift changes in customer tastes, legislation shocks, and the list goes on. Differentiation is the only viable means to negate this value trap and spread your risk. Plimsoll provides a range of services that will help you find potential new markets to pivot towards, assess the rewards they offer and assess key players already within them.
Too reliant on key staff
Does your business have one or two employees that, were they to leave abruptly would plunge your business into crisis? The dangers of key parts of your business residing inside the brains of a few key members of staff should be self-evident. If they leave, your day to day operation could be severely compromised.
Apple was able to seamlessly fill the role of CDO on Jonathan Ive’s departure. The result? Tens of millions of Apple watches were on people’s wrists as Jeff Williams took over the reins and put his own stamp on the design. However, few businesses have the same scale as Apple and a stream of “off the peg” replacements ready to take over mission-critical roles. For the rest, it is imperative your training and procedures are of sufficient quality to ensure continued operation.
A valuation of your business is a recognition of its ability to continue generating the performance it enjoys currently for a number of years into the future. Clearly, companies where that future is jeopardized by reliance on irreplaceable staff often command a much lower figure.
Too many people
The flip side of reliance on too few senior people is the tendency of companies to employ too many people in total. The most expensive and inefficient resource a business utilizes is its staff. Employing, and paying for, more staff than is absolutely necessary is a trap that many businesses fall into.
Failure to maintain a close monitor on the productivity of your business and the profit generated per employee directly leads to lower profit margins. This feeds into a lower base valuation with more money flowing out of your business in wages, taxation and other human costs.
The pandemic has presented businesses with a one-off opportunity to reassess how many people they need to reset efficiency goals and, by default, increase the value of their business.
Plimsoll provides a host of tools that allow business leaders to see whether they are generating enough return from their investment in human capital. Once a measure of productivity has been taken on your business, we then allow for instant benchmarking against others in your key industries so you can see how you compare.
Too much waste
Companies that manage to maintain an elevated, and increasing value of their business have one key characteristic in common; they all manage to avoid carrying too many business units, products or services that are loss-making.
Any part of your business that continues to make a loss year on year needs to be assessed and potentially shuttered. In some cases, this may lead to a fall in sales, but the increase in profit and value far outweighs the loss in vanity.
Of course, new ideas can take a number of years before they generate a profit return. However, a timeline for profitability must be built into the strategy of any new venture or investment to ensure it is adding value rather than destroying it.
Plimsoll provides a host of tools that allow you to measure profit return across your business. You will be able to see, year on year, whether your strategic decisions are delivering the requisite return and how you benchmark against your peers.
These four business value traps do not sit alone among the reasons some businesses are worth less today than they could potentially be. From directors running lifestyle businesses and using it as a piggy bank to overly indebted businesses losing all their margins to interest payments, the reasons for depressed valuations are numerous. However, those reasons are obvious and well documented.
The traps covered here are more subtle and have the ability to creep up on any business owner. A business serving a narrow market, reliant on a couple of key senior or expert staff, with too many other roles delivering low ROI and chasing sales rather than margins, will never deliver high company values.
To learn how Plimsoll can help you instantly assess your own business, its value, and strategic options to increase it and benchmark against your peers, search for your industry at www.plimsoll.co.uk today.