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 are many different ways of looking at intangible capital. For this discussion we are going to focus on a four part classification, the 4Cs:
- Customer Capital: the strength and breadth of your relationships with customers
- Human Capital: your team and their ability to run without you
- Structural Capital: the systems and technology your business runs on
- Social Capital: the culture of your organisation and how things move together in the same direction
Having solid customer, human, structural and social capital assets makes 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 increase the value of your business and make it more attractive to buyers.
There are two very good reasons to focus on the 4Cs. The first is transferability. Strong intangible capital helps your business operate under its own steam without constant owner involvement. This is what any potential purchaser wants. The second reason is that businesses with strong intangible capital perform better overall. Whether you sell or not, you will 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 weaknesses and establish where improvements can be made.
Customer capital
Without customers you have no business. Small and mid-sized businesses often rely too heavily on one or two core customers or channels. A diverse spread of customers is desirable. In many of the businesses we work with, the core customer relationships rest with the owner. To some degree this is inevitable. You have built the business by getting to know your customers and making sure they are well served. There are, however, ways to make these relationships more transferable.
A useful first step is implementing a customer relationship management (CRM) platform and using it well. CRMs are often implemented but less often used to maximum effect. When they are implemented properly they provide a record of relationships and interactions across sales, marketing and customer service. This allows you to optimise those relationships and 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 helps you continually ask how you can improve. A superb customer experience starts a chain reaction that increases loyalty and profit.
We recommend spending as much time maintaining existing customers as you do attracting new ones. By knowing your customer and implementing the right strategies, you can guide them towards making smarter and larger purchasing decisions.
Human capital
Human capital is more than a headcount or the number of people assigned to do various tasks. It is the measure of talent within the business. For some buyers this is more important than customer capital. It is a key element of your business’s market worth and a potential buyer will identify this early in a sale process. It may be one of the things that attracts them to your business in the first place, because talent is a reliable indicator of a high-performing business.
You want the right blend of experience, skills and specialist knowledge. The people within the business are a key differentiator between you and your competitors. They are assets and a strong indicator of the overall health of the business.
Your human capital indicators might include the training and professional development you offer, the emotional intelligence displayed by your leadership team and the employee wellbeing initiatives in place.
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 it treats its customers because both are driven by purpose, values and culture.
Structural capital
Structural capital covers what your business needs for its employees to function at a high level. Your employees and departments require the right training, documentation, technology, tools and equipment to operate at their best. Under-developed structural capital will prevent you getting the best out of your teams and will make your business less transferable.
Two good things happen when you have strong structural capital:
- Each department can be as autonomous as you want it to be while still operating within a collaborative framework across the wider business. Reliance on a department or individual is reduced so success is less dependent on any one person’s ability.
- When the right structure is in place, the business is better able to meet customer needs.
No structure is perfect. There is always room for improvement through investment, review and optimisation. As a business owner, ask whether your structural capital is consistent, efficient and positively affecting your other intangible assets.
Social capital
Social capital consists of the relationships that help businesses work more effectively. It covers how the business communicates, how it interacts internally and externally, how it embraces the vision and purpose and how it brings people together so the whole becomes greater than the sum of the parts.
It may be difficult to measure, but most owners know when they have it. Tell-tale signs include:
- Smooth and efficient communication
- Teams united and on the same page
- Core values visible at all levels of the organisation
- Employees motivated around a clear vision or goal
- High levels of trust
Many owners underestimate its importance or are unsure where to make improvements. Promoting open communication and encouraging 360-degree feedback can support transparency and open dialogue, although this has become more challenging for businesses embracing remote and flexible working.
Social capital is also important because it brings the customer into the organisation. Customers gravitate towards businesses that demonstrate values and respect. This is reflected in customer service and satisfaction.
The best way to manage your social capital is to set your employees up for success. How this looks will differ between businesses, but connection is usually central. The most successful owners work hard to create communities and networks of engaged, motivated employees.
A final word
Addressing the 4Cs now will keep you focused on the end game and support a successful exit. If you are struggling to evaluate the 4Cs or do not know how to improve them, we recommend speaking with an Exit Specialist or advisor who can provide an objective assessment and help you build your intangible capital.
High levels of intangible capital will increase the transferability of your business and its value, making you more attractive to buyers and improving your sale price. Intangible capital is central to the value of your business and to the exit planning process.