The 4 key qualitative aspects to increase the value of my business
We are together in each step
It is common to use mainly quantitative variables, rather than qualitative aspects, to define the valuation level of a company. As the investor actually buys future expectations, ratios such as historical sales growth and EBITDA margin on sales are recurrently taken into account in valuations both in the DFC method as in the Valuations per Multiple.
In this article, we would like to highlight the qualitative aspects that investors take into account when analysing the risk of a company and which are as important as financial ones. Taking these variables into account is of vital importance when defining your Growth Plan and thus maximise the future value of your company in the medium term. There are four critical qualitative aspects:
The Quality of Revenues
The Competitive Position
IP & Business Model
1. The Quality of Incomes
Regarding the first of the qualitative aspects, it is essential to reinforce those variables that improve the predictability and future assurance of income and show strength in growth capacities.
Customer concentration: A greater diversification of income among different customers means a reduction of risk and dependence on one source of income. Investors therefore reward this with a higher valuation.
New customer registrations: A greater capacity to add new customers reflects a greater capacity for revenue growth. Therefore, investors buying into future expectations are willing to pay more for a company with greater capacity for growth.
Upselling/Crossselling: Once in business with a customer, upselling involves growing sales with that customer over time. Investors are willing to pay more for a company because it means the ability to grow with less commercial effort.
Customer deregistrations: A company that loses customers reflects a problem in supply or competitive position. Therefore, investors penalise companies with high churn rates as they perceive a higher risk, which is one of the qualitative aspects to be taken into account.
"Customer downselling: Once a business has started with a customer, downselling means a decline in the level of sales with that customer over time. Investors penalise this trend as it implies greater uncertainty about future sales.
2. Talent Qualification
With regard to the second qualitative aspect, knowledge-based companies have their main asset in the people who make up their organisation. A good team helps the investor to perceive a greater capacity to overcome the challenges presented by the market:
Talent Retention: is considered to be one of the most important qualitative aspects. Investors attach great importance to the talent retentionespecially the one considered key after the transaction. Therefore, a high level of turnover increases the risk and is penalised in the valuation.
Qualifications and experience: Investors view qualification and experience positively as factors to be able to provide a differential to the client and as the ability to adapt to future market challenges. Elements such as the level of certification, internal training systems, etc. are affected.
Sales and Marketing: The team in charge of incoming revenues is key to future development. The investor rewards the degree of professionalisation of this department and the degree of linkage. For example, variable remuneration systems are valued and non-exclusive external agent systems are penalised.
Professionalisation of HR: In an IT services company, the main value lies in the people and their capacity for development. Therefore, investors positively value companies that have professionalised this function by developing career plans, training systems, job profiles, performance evaluation, remuneration systems, etc.
3. Competitive Position
As for the third of the qualitative aspects, the analysis of the opportunity must always be analysed in a competitive context and must weigh its advantage relative to the difference with the competition. In this sense, we recommend carrying out the analysis from two points of view:
Financial: by comparing the main financial terms with those of the competition. In a first approximation we analyse historical growth, profitability, relative size and solvency level.
Market proposal: It is very difficult to generalise on this point and will depend on each sector. It is useful to include in the comparative analysis those qualitative aspects and other variables that the customer uses to decide which offer to choose.
4. IP & Business Model
With regard to the last of the qualitative aspects, this point is of vital importance because it depends to a large extent on the level of engagement or exit barrier that the customer has and, therefore, on the degree of uncertainty about future sales:
Product vs. Service: On the lowest scale of relative value are companies that only offer service and on the highest scale are companies that offer a "Software as a service" where the customer has to pay a subscription fee if he wants to continue using the application. In between are recurring maintenance or perpetual licences.
Value chain position: whether the product is proprietary or relies on a third party manufacturer, whether the company's role is as a distributor, implementer or developer, all of these are variables that affect the value of the company.
Improving the value of your company is not a task of today for tomorrow, it requires a prior diagnosis and a well targeted growth plan. At Baker Tilly we can walk this path together. We do this on a daily basis with our clients.
Baker Tilly Global Deal Advisory trading as Baker Tilly Global Deal Advisory is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International does not provide professional services to its clients. Each member firm is a separate and independent legal entity, and each describes itself as such. Baker Tilly Global Deal Advisory is not the agent of Baker Tilly International and does not have the authority to bind Baker Tilly International or act on behalf of Baker Tilly International. None of Baker Tilly International, Baker Tilly Global Deal Advisory, nor any of the other Baker Tilly International member firms has any liability for the acts or omissions of the others. The Baker Tilly name and associated logo is used under licence from Baker Tilly International Limited.