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Sometimes, it’s less about the growth story and more about managing risk. What are the five non-financial areas advisors can help clients focus on to de-risk their business and better secure funding from lenders?
Slightly more than half (52%) of business owners claim that they have built sufficient business value; however, only 35% have gotten an independent valuation, according to a Business Exit Institute 2022’s Business Owner Survey Report. With baby boomers owning a staggering $7.4 trillion in private businesses, this is a call to action for advisors of business owners.
With many of these boomers set to retire, a valuation of the business is critical for succession planning. For other businesses, having a pulse on valuation is key in conversations with lenders. But understanding a business’ financial performance and growth story is just one element.
In the past, financial performance analysis relied on factors like historical financial statements, cash flow projections and budget forecasts, which were considered sufficient. But the landscape has changed, and non-financial metrics have gained considerable importance. Lenders and potential acquirers now give equal weight to financial and non-financial indicators, demanding a more comprehensive evaluation.
As a veteran in exit planning, assisting over 800 companies in achieving successful exits, I have identified 150 key non-financial metrics across various areas that significantly influence lenders' decisions and impact a business's valuation. These metrics encompass corporate governance, occupational health and safety, IT and cybersecurity, environmental sustainability, remuneration models, and management structures.
Non-financial metrics offer business owners a strategic approach to mitigate risk and enhance value. Moreover, these metrics have a direct impact on the potential valuation multiple a business can achieve during a sale. During uncertain times, there’s a lot that business owners have significant control over, allowing for relatively easy improvements. By focusing on non-financial metrics, advisors can offer invaluable counsel and boost the financial value of business clients.
Your business owner clients must consider these five factors to position their businesses favorably and navigate uncertain market conditions:
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Risk analysis: Risks can be in the people who run and operate the business, the underlying IT and cybersecurity, corporate governance, health and safety, compliance and regulation, and financial management. Are the firm’s tax returns in order? Are there back-up facilities in place and a disaster recovery plan? Does the business have robust accounting systems that allow for reports on top customers, top suppliers, debtors, creditors, KPIs? These are key questions that must be answered.
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Succession planning: Not every business is the Logan Roy family, but having an understanding of who will run the business in a future state is vital. Regardless of their plans, 100% of business owners will ultimately leave their business.
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Benchmarking and profit gap analysis: Help your client compare against its industry peers to identify improvement areas and prioritize growth opportunities.
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Environmental, social, and governance (ESG) factors: ESG factors can impact financial performance through a variety of channels, including reputation risk, operational efficiency, and innovation. For example, companies with strong ESG performance may be better positioned to attract and retain customers, employees, and investors.
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Value acceleration: Illustrating the risks in any business will help prioritize action. Confronting the above items will increase the likelihood of funding by mainly focusing on risk mitigation, but it will also help to have a strong growth plan for the equity value of the business.
These non-financial metrics offer a comprehensive understanding of a business's operations, governance, and sustainability, aligning with the evolving priorities of lenders and potential acquirers. In today's complex economic landscape, small and medium-sized businesses need to go beyond traditional financial metrics to enhance their valuation. As an advisor, embracing these metrics not only strengthens your client's market position but also empowers them to navigate uncertainties and seize growth opportunities. By focusing on areas such as risk analysis, ESG factors, succession planning, benchmarking and value acceleration, business owners can mitigate risks, increase company value and improve their chances of securing successful loans.
Craig West is founder and chairman of Capitaliz, a leading digital platform for exit planners and advisors to deliver scalable business valuation, succession, and exit planning outcomes.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
