Most owners are focused growing their business. They understand that growing sales and profitability is the most obvious way to increase the value of their business. There is belief that potential purchasers will perceive this value even while failing to see what purchasers look at in addition to earnings. Purchasers are obviously interested in companies with consistent or growing sales and solid profitability, and this will initially tweak their interest so that they want to learn more. Frequently their interest ends at this point or any offers made for purchase do not seem to reflect established earnings. The quantitative analysis looks good, but the purchaser’s qualitative analysis has revealed value-damaging risk for the purchaser.
Business value, from a purchaser’s perspective, is a combination of the quantitative and qualitative factors that make up the business. For example, imagine 2 companies that are nearly identical: each are in the same industry, sell the same products to the same customer type, and have the same gross profitability, net profitability, and similar debt/equity structure. The market, in general, should perceive similar value to each of these companies. Now imagine that one of them has 30 customers with the largest customer comprising 10% of sales while the other’s largest customer accounts for 72% of sales. Which business would you rather own? Which business would you value more? Which business has higher quality of earnings?
Building qualitative value
Building qualitative value means improving the market-perceived weaknesses in your business. An entrepreneur may not see a weakness at all because they have successfully managed the risk for many years, but potential purchasers only see risk beyond their tolerance, or risk that needs to be managed by adverse pricing or detrimental purchase terms. Identifying and proactively mitigating qualitative risks prior to exposing a business for sale in the market is time well invested; it can result in stronger offers and better purchase terms.
Building qualitative earnings improves the value and marketability of a business. That being said, if it is so effective, then why don’t more business owners do it? The main reason is that they don’t perceive the risk it, or they don’t fully understand how the market perceives the risk. Paladin CMS can help identify the qualitative opportunities and help mitigate the qualitative risks. We help businesses become ‘market-ready’ so that your company stands out among a crowded field of investment opportunities.