Exit Planning - What drives value

| 11 minute read
Andrew Martin
Author Andrew Martin
Article 4 in our Exit Planning series 
What drives value?
The value of your business depends on the value in your business. Driving this value requires developing intangible capital. Intangible capital is not the physical assets of your business, but things which have a degree of subjectivity, for example the strength of your customer relationships. The simple fact is, the majority of a company’s value is tied up in things you cannot touch.

There’s many different ways of looking at the intangible capital, but for this discussion we’re going to focus on a four part classification – the 4Cs:
  1. Customer Capital – the strength and breadth of your relationships with customers
  2. Human Capital –your team and their ability to run without you
  3. Structural Capital - the systems and technology your business runs on
  4. Social Capital – the culture of your organisation and how things move together overall in the same direction
Having solid customer, human, structural and social capital assets make for a value-laden and healthy business. From our experience, approximately 80% of a company’s value lies within its intangible capital. If you are a business owner thinking about exit planning, then concentrating on improving these areas will drive up the value of your business and make it more attractive to buyers.
There are two very good reasons why you should focus on the 4Cs. The first is transferability. Having strong intangible capital makes your business more able to operate under its own steam, without the need for an owner’s direct involvement. This is what any potential purchaser of your business wants. The second reason is, businesses with strong intangible capital perform better overall and whether you sell or not, you’ll have a higher performing organisation that is more enjoyable to run.

Begin by identifying how each of these elements affects your business as a whole and examining what value they bring to the company. Assess your strengths and your weaknesses and establish where improvements can be made.

Customer capital

Without customers you have no business. Small and mid-sized businesses often have a customer concentration relying too heavily on one or two core customers or channels. Having a diverse spread of customers is desirable. In many of the businesses we work with, the core customer’s relationships rest with the owner. To some degree this is inevitable, you’ve built the business and done so by getting to know your customers and ensuring that they’re well served. But there are ways you can make these relationships more transferable.
A first step is having a customer relationship management (CRM) platform (that you actually use well). CRM’s are often implemented, but far less often used to maximum effect. When implemented well they provide a record of your relationships and interactions across sales, marketing and customer service, allowing you to optimise those relationships, but also spread customer ownership across the organisation.
It is the customer who gives your business the chance to grow capital by buying your products. Viewing the customer as the key stakeholder will help you to continually ask how you can improve. A superb customer experience kick-starts a chain reaction that increases loyalty and profit.

We recommend spending as much time maintaining existing customers as you do attracting new customers. By knowing your customer and implementing strategies, you can drive them towards making smarter and bigger purchasing decisions.

Human capital

More than a head count or the number of people assigned to do various tasks, human capital is the measure of talent within the business. For some buyers this is more important than customer capital. It’s a key element of your business’ market worth and a potential buyer will have identified this early in the sales negotiation. It may have been one of the things that attracted them to your business in the first place, as talent is a reliable indicator of a high-performing business.

You want the perfect blend of experience, skills, and specialist knowledge. The people within the business are the key differentiator between you and your rival down the road. They are your assets and a reliable indicator of how much they contribute to the health of the business.

Your own human capital indicator may include what training and professional development courses you offer, the emotional intelligence displayed by your leadership team and what employee wellbeing initiatives are available.

Investing in human capital empowers your teams to do their jobs more efficiently and to the best of their ability in a healthy work environment. How a business treats its employees is a good gauge of how they treat their customers as they are driven by a clear purpose, values, and positive culture.

Structural capital

Your structural capital considers what your business needs for its employees to function at a high level. Your employees and departments need the appropriate training, documentation, technology, tools, and equipment to operate at peak levels. Under-developed structural capital will prevent you getting the best out of your teams and makes your business less transferable.
Two good things happen when you have strong structural capital in place:
  1. It enables each department to be as autonomous as you want them to be but still has them performing as part of a collaborative framework within the workings of the overall business. It takes away reliance on a department or individual, so success isn’t dependent on the ability to perform specific tasks.
  2. If the structure is in place for the team to do its job, the business is better able to meet customer needs.
No structure is perfect. There is always room for improvement through investment, which can be achieved through continuous review and optimisation. As a business owner, ask yourself if your structural capital is consistent, efficient and has a positive effect on your other intangible assets.
Social capital

Social capital consists of the relationships that make businesses work more effectively. How the business communicates with each other, interacts internally and externally, embraces the vision and purpose, and brings its people together can be hard, but focusing on it ensures the whole becomes greater than the sum of the parts.

It may be difficult to measure, but most owners will know it when they have it. Some tell-tale signs include:
  • Smooth and efficient communication
  • Teams are united and on the same page
  • Core values run through all levels of the organisation
  • Employees are motivated around a vision or goal
  • High levels of trust
Many owners either underestimate its importance or struggle to understand how and where to make improvements. Promoting open communication and encouraging 360 feedback to facilitate transparency and open dialogues are two methods. Although these have become ever more challenging for businesses embracing remote and flexible working.

Social capital is important for another reason. It brings the customer into the organisation. Customers gravitate towards the businesses that promote values and respect. This comes through loud and clear in customer service and consumer satisfaction.

The best way to manage your social capital is to invest in setting up your employees for success. How that looks will differ from business to business, but “connection” is often key. The most successful business owners are the ones who work hard to create communities and networks of engaged and motivated employees.
A final word
Addressing the 4Cs now will keep you focused on the end game and facilitate a successful exit. If you are struggling to evaluate these 4Cs, or don’t know how to improve upon them, we recommend you contact an Exit Specialist or advisor that can provide you with an objective assessment and help you improve your intangible capital.
High levels of intangible capital will increase the transferability of your business and in turn its value, making you more attractive to buyers and resulting in a higher sale price. We can’t over-state the importance of intangible capital to the value of your business and the exit planning process.

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