The 4 key qualitative aspects to increase the value of my business

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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 over sales are recurrently taken into account in valuations in both the DFC Method and Multiples Valuations.

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 just as important as the financial aspects. Taking these variables into account is of vital importance when defining your Growth Plan in order to maximise the future value of your company in the medium term. There are four critical qualitative aspects:

  1. The Quality of Income
  2. Talent Qualification
  3. Competitive Position
  4. IP & Business Model
qualitative aspects

1. The Quality of Income

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.  

The 4 key qualitative aspects to increase the value of my business
  • Customer concentration: A greater diversification of revenues 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 additions: 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/Cross-selling: Once a business has started 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 churn: 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 activity with a customer has started, downselling involves 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:  

The 4 key qualitative aspects to increase the value of my business
  • Talent retention: this is considered one of the most relevant qualitative aspects. Investors consider the retention of talent to be very important, especially talent considered key after the transaction. Therefore, a high level of turnover increases risk and is penalised in the valuation.
  • Qualification 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 revenue 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.
  • HR professionalisation: In an IT services company, the main value lies in 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:  

The 4 key qualitative aspects to increase the value of my business
  • Financial: comparing the main financial terms with those of the competition. In a first approximation we analyse historical growth, profitability, relative size and level of solvency.
  • Market proposal: at this point it is very difficult to generalise and it will depend on each sector. It is advisable to include in the comparative analysis those qualitative aspects and other variables that the client 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:

The 4 key qualitative aspects to increase the value of my business
  • 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" in which the customer has to pay the 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 that of distributor, implementer or programmer, 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 it on a daily basis with our clients.  

The M&A Professionals



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