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The Four Pillars of Value that Determine How Much Your Business Is Worth
By Quiet Light
As an owner, it’s crucial to have a clear understanding of the Four Pillars of Value that determine how much your business is worth. Not only do these elements impact your prospects for selling, but they can also be used as guideposts to help you make smart decisions when running your business.
In addition to a business’s earnings, there are numerous other factors that make a business more or less valuable. Each of these component factors falls into one of four categories: growth, risk, transferability, and documentation.
The following infographic summarizes each of these four pillars. Below the infographic, we’ve also included a more in-depth analysis of each pillar.
The first of the four pillars of value is growth. One of the best ways to predict the future is to look at the past. Therefore, businesses that have a strong history of growth are more valuable than those that have plateaued or are declining.
The most important growth metric is earnings growth. If your business has been steadily growing, it shows that your business model is viable. It also instills confidence in buyers that your business can generate a strong ROI after the acquisition.
In addition to historical growth, people who are seeking to buy a website will also pay attention to opportunities for future growth. It’s one thing to know that your business has done well in the past, but it’s another to have confidence that it will continue growing in the future. Therefore, if you’re selling your business, it’s important to be able to communicate strategies that can lead to growth moving forward.
“One of the best ways to predict the future is to look at the past. Therefore, businesses that have a strong history of growth are more valuable than those that have plateaued or are declining.”
For ecommerce businesses, growth strategies often include:
- Launching more products
- Optimizing advertising campaigns
- Improving supply chains
Content sites often turn to creating more engaging content or establishing affiliate partnerships. Every business is different, so it’s important to look critically at your own business to identify which activities represent the greatest opportunities for growth.
The second of the four pillars of value is risk. Just as buyers love to acquire businesses with strong growth potential, they shy away from those fraught with risk. After all, who wants to invest significant capital into an asset that will likely plummet in market value? All else being equal, a business is more valuable if it isn’t exposed to significant risks.
Single points of failure
If your business has a significant single point of failure, that could raise concerns among buyers. For example, if 90% of your revenue is generated by one product (i.e., a “hero SKU”), buyers may be wary. If something happened to your supply chain, your entire business could be in jeopardy.
Similarly, content websites that rely on just a few long-tail keywords may face a similar risk and thereby have a lower website value. If the search algorithms change or a competitor knocks them out of the top search results their traffic volume might plummet.
When identifying risk and defending against these sorts of issues, business owners should seek to minimize or eliminate single points of failure as much as possible. This may mean:
- Reevaluating supply chains
- Launching more products
- Investing in high-quality content
- Exploring new advertising or marketing channels for value creation.
“If your business has a significant single point of failure, that could raise concerns among buyers.”
In addition to single points of failure, competition can be another source of risk for businesses. If there are several competitors who are intent on launching products that compete with yours, that could be concerning. This is especially true if they’re effective at taking customers and market share from you. For this reason, it’s critical that you establish a clear competitive advantage to defend your market positioning to reduce acquisition risks.
Market conditions can create additional risks for some businesses. If you’re operating in a market that is unstable or threatened by economic downturns, buyers may be wary of acquiring your business. In some cases, it may be hard to avoid unfavorable market conditions. In other cases, you might be able to minimize the impact by expanding to adjacent markets that are less negatively impacted.
Transferability is the third of the four pillars of value. All else being equal, businesses that can be easily transferred to a new owner will have a higher website value than those that have barriers to transferability. Therefore, before going to market, it’s important to find ways to make your business as transferable as possible.
There are a few common reasons why businesses may be difficult to transfer. For example, if you’ve built a blog that relies on your personality and likeness, it’s going to be very difficult for a new owner to succeed without you. Unless you’re willing to stay intimately involved with the business after selling, it’s going to be hard finding someone to invest. Even if you do find a potential buyer, it’s likely they won’t be willing to pay as much. To address this issue, it’s typically best to remove your personality and likeness from the business as much as possible before selling.
If your business requires the owner to have specialized knowledge or certifications, that could be another issue for transferability. For example, let’s say you run a financial advisory firm that requires you to be a certified financial advisor. If that’s the situation, your business may still be sellable, but you’ll be working with a much smaller pool of buyers, leading to a lower purchase price.
A third barrier to transferability can be operational challenges. If your business is disorganized and difficult to manage, fewer buyers will be interested. In turn, you’ll receive a lower purchase price when selling.
To prevent this, owners should seek to systematize their business as much as possible. Standard operating procedurescan go a long way toward helping build value and receiving a higher purchase price.
The last of the Four Pillarsof Value is documentation. As the term implies, documentation refers to your business’s practices of recording and storing important business information.
One of the most important areas in which documentation is important is your financial statements. To sell (and manage!) your business, it’s essential to maintain accurate financial records that detail all income and expenses. For Amazon and other ecommerce businesses, it’s important to have financials on a monthly basis using accrual accounting.
Your financials both you and buyers to understand the story of your business on a deeper level. Trends, seasonality, and growth opportunities all become clearer when you dive into the financials. Not to mention, the financials are absolutely essential to perform an accurate valuation. This is true whether you’re having it done by a website value calculator or an industry professional.
Documentation also refers to invoices, analytics and digital marketing reports, customer retention reports, legal contracts, and any other documents that verify the activities of your business. Being able to provide these items goes a long way toward instilling confidence in buyers and verifying the history of your business. Sales and marketing reports are also useful for creating effective content development strategies.
“Your financials both you and buyers to understand the story of your business on a deeper level.”
Importance of the Four Pillars of Value
As an online business owner, the Four Pillars of Value can provide you with a clear understanding of what’s important to focus on when growing your business. By concentrating your efforts on the areas that matter most, you’ll be able to constantly improve your online business’s value in order to successfully reach your exit goal.
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