Value Drivers

Let’s talk about the elephant in the room. Most, if not all, business owners want to grow the value of their business, but the vast majority of them do not fully understand what drives business value. Is it cash flow? Profitability? Revenue growth? Sure, it can be any or all of those things. The formula behind business value is pretty simple though:

Business Value = Present Value of (all future expected cash flows) / (expected risk rate)

 

It is all future expected cash flows, discounted back to present value, using a discount rate, or risk rate, that is appropriate for the business. When considering an “expected risk rate,” think about the difference between CD rates and stock market risk rates. CDs typically pay 1% or less, because there is very, very little expected risk. Stock market returns are in the 13% range, historically, because there is much greater expected risk.

So, there are many factors that con contribute to the value of your business. Assuming you want to grow the value of your business, then Tembo can help you identify the factors that are most significant in determining value for your business, and can then help you focus on improving those factors so that you create as much value as possible.

shutterstock_119983759
Ok, so it's a little more complicated
Ok, so it's a little more complicated

Examples of Variables that Influence Value:

Depth of Management

Shallow depth erodes value; strong management increases value

Operating Leverage

Increasing leverage increases value

Customer Lifetime Value

Higher customer value increases business value

Customer Retention

Greater retention increases value

Profitability - Consistency

Long-term, sustainable, and consistent profitability increases value

Profitability - Growth

Growing profitability increases value

Contribution Margin

Focusing on your contribution margin increases value

Brand Awareness

A wider audience for your brand, the higher the value

Raving Fans

The more customers you have promoting your message, the higher your value

Capital Structure

Efficient use of debt increases value

Working Capital

Sufficient working capital to support growth increases value

Investment Capital

Increase value by deploying investment capital