From XU Magazine, 
Issue 20

Know your value: the impact on company valuations – How getting the basics right increases the value in your business

Carrying out a company valuation isn’t just a concern for those looking to exit a business. In fact, understanding and cultivating the value of your company is something many founders, owner-managers, CEOs and leadership teams see as a key priority. Anil Stocker, CEO and Co-founder of MarketInvoice, explains the results of their research into attitudes to company valuations, and the key part that financing has to play in success…
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Company valuations are always a hot topic among UK SMEs, especially if you’re based in the centre of the burgeoning London startup community, like we are at MarketInvoice.

Knowing the intrinsic worth of your business isnít just a consideration at the sale or acquisition stage. Company valuation is often seen as a key metric of success by aspirational startups and growing SMEs, with many making it a core priority. The key question, though, is why.

To understand more about the way business owners think about company valuation, we’ve carried out our own research, talking to 1,000 UK SMEs to gauge the part that value has to play.

Company valuations as a key metric of success

66% of owners confirmed that valuation was a huge priority for their business, according to our MarketInvoice Business Insights report. This is especially true among younger entrepreneurs, with 78% of younger owners naming company valuation as priority one.

Knowing how your value compares against competitors, and within the wider market, is a key piece of business intelligence. With the average UK SME worth £2.9m, this valuation figure gives owners, founders and leadership teams a benchmark to aim for, making it a metric thatís likely to feature highly over the course of the business journey.

But should we be obsessing so much over this singular company valuation metric?

The real value contained in your business

Company valuation may be a financial metric, but the actual value of your limited company isn’t just the equity, assets and cash reserves that are locked up in your finances.

In many ways, value goes beyond the financial numbers to the fundamental building blocks of the business – the elements that allow you to trade effectively, attract the right customers and give you a competitive edge in your market.

Value can come from:

Your products and USP – if you have a product/service that offers a unique selling point (USP), or has a competitive advantage in your sector, that adds considerable value to your market position and your ability to win sales and bring in revenue.

Your people and talent – people are a hugely valuable asset in the company, so attracting and retaining the very best talent is critical. The right executive team, the best managers and the most effective workforce all add to your value as a company.

Your potential for growth – a valuation isn’t just based on your current position; it’s also measured on your ability to create future sales, revenue and profits. So nurturing and growing the business is crucial if you’re aiming to add value.

For example, the UK SMEs we spoke to saw value across a diverse range of areas.

The barriers to increasing your valuation

30% of the companies we spoke to increased their valuation by more than 10% over the previous 12 months. But, interestingly, 18% saw no change in their valuation – and 20% actually saw a fall in value of 10% or more over the year.

An increase in valuation is certainly possible, so, what’s holding these companies back?

According to our research, the biggest hurdle to growing valuation is finance.

A lack of appropriate finance options to grow the company is the largest obstacle for SMEs to overcome, with insufficient technology infrastructure coming second and finding the right people coming third.

When you don’t have access to appropriate finance, it can:

Limit investment in the business – without access to additional funding, you restrict the amount of capital that’s available to invest back into the business.

Remove the fuel from your growth plan – without the finance to fund the next stage in your expansion, growth plans have to be revised, or even put on hold completely.

Make you less attractive to lenders and investors – ironically, if you’re cash-poor and have a low credit rating, you’re less likely to attract funding from investors.

Restricts your ability to increase the value – with – limited amount of capital, an inability to grow at pace and a poor access to extra funding, it becomes increasingly difficult to focus on adding value to the company.

Choosing the right finance to boost growth

The key takeaway from our Know Your Value research is that appropriate finance is critically important for any SME looking to move the needle on their company valuation metric.

For the company to invest, grow and increase valuation, it must be properly financed. This means being proactive around cash-flow management, spend management and reducing aged debt etc. It also means choosing the right finance options to top up the cash reserves, or fund the next stage in your longer-term growth strategy.

26% of companies favour invoice finance to boost growth and valuation. The simplicity of this kind of finance makes it a clear leader when it comes to quickly injecting working capital into your business. Tellingly, only 6% of companies favour Dragon’s Den-style investment, such as private investment or venture capital investment – options which take more time, more effort and more guarantees for a business to secure.

Getting the basics right; continue to grow

Removing the finance hurdle sets a more level playing field for SMEs that are looking to grow. But success, growth and added value won’t come from finance alone.

To push your value effectively, it’s vital to:

Invest your money wisely – and have clearly defined and agreed budgets so you can track and manage the return you get on your investment.

Keep developing your product/services – increasing your sales is a must, so keep refining and adding to your product/service offering and customer value.

Build the best possible team – to grow at scale, you need a team that’s up to the job. Expanding your roles and resourcing gives you the ability to meet your goals.

Expand your infrastructure – to provide the property, technology, equipment and operational capabilities you need to keep pushing your expansion

Continue raising your market presence – sales, marketing and social media activity all help to raise your profile in the sector, adding to your perceived value as a company.

Keep in control of your cash – balancing the books, staying in control of cash flow and having effective access to additional funding are vital, guaranteeing you have the liquid cash to fund all elements of your value growth strategy.

Our conclusion: it’s imperative that you, as a business owner or executive team, stay focused on your product or service offering and ensure the fundamentals are right first.

Adding value is as much about managing cash flow and working capital as it is about having the right people in the right roles. When you get the basics in place, the rest will take care of itself.

Why leave it there?

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