The valuations of the average British business appear to be in stasis. Global conflict, inflation, Brexit reality, human resource scarcity, political crises and a host of other macroeconomic factors are conspiring to make it more difficult for business to increase their value.
Alas, the world is tumbling into 2024 in a similar state of perpetual perma-crisis. War and economic frailty look set to be the backdrop to another period of prolonged uncertainty. However, deep the crisis, however big the blowback, business carries on. In times of strife, you as a business leader must focus your energies on one key measure – the overall valuation of your business.
As a director, stakeholder and decision maker, macroeconomic factors are beyond your control. All you can do is focus on your business and above all else, the consequences of the strategic decisions you make within it. Ultimately, are you adding value to your business?
At Plimsoll, everything we do is aimed at helping leaders make better, more intelligence-based business decisions. We facilitate this by distilling complex, cumbersome financial data on any company into easy-to-read valuation and performance analysis. We have provided such valuation studies for more than 40,000 clients, across 96 different countries over the last 40 years.
During these four 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. Brexit has rendered many European markets unfeasible. Those serving narrow market sectors that they become locked out of are left with an unsustainable business model.
Restricted access to key markets is not 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 rentals think Netflix. Retail think Amazon. All relatively mundane markets, often very localized were decimated by a tech disruptor. If your business value relies 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 most, 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 many years into the future. Companies where that future is jeopardized by reliance on a few irreplaceable staff often command a much lower valuation figure.
Too many people.
The flip side of reliance on too few senior people is the tendency of companies to employ too many people overall. The most expensive and inefficient resource a business utilizes is its staff. Employing, and paying for, more staff than is 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 years presented businesses with a unique, one-off opportunity to reassess how many people a business needed to optimise its efficiency and, by default, increase the value of its 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 spun off or closed. In some cases, this may lead to a fall in group 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 can 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.
Please call our Valuations Team on 01642 626438 to request a FREE sample valuation report to show how Plimsoll’s unique Business Valuation Reports can help you set your business on the path to greater value.
Alternatively, 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.valueyourcompany.com today.
Published on: 8/11/2023