How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
This is part 15 of a 17-part series on global expansion. You can find the full list below this article.
Let’s say there are two car insurance companies up for sale in the US, and you’re thinking of buying one of them.
The first one is called “ABC Car Insurance”, and they offer their protection to customers according to a monthly or annual subscription from the moment a customer buys a new car. Since car insurance is mandatory in almost all States, the business model works well enough although many customers select the minimum requirement as per their State.
The second company, called “Oh Yes! Car Insurance”, has a business model in which they only charge customers for protection whenever a customer is driving their car. In this pay-per-mile concept, Oh Yes! Car Insurance charges a lower monthly rate compared to ABC Car Insurance plus a few cents for every mile the car is driven.
Which company do you think holds more value?
Well, to give you a bit more detail, customers tend to opt for Oh Yes! Car Insurance because they like knowing that they are not going to be overcharged for the time they do not use their vehicle. Because of this attractive offer from the customer’s perspective, Oh Yes! Car Insurance can win more clients over time than ABC Car Insurance and generate more revenue, making it the more valuable business to buy from a revenue forecast perspective.
On the surface, a business that has a greater potential for future cash flow will be considered more valuable to a potential buyer…
…but…there are other factors that go into valuing a company beyond future revenue that you’ll need to consider when making adjustments to your company.
And the reason why it’s important to know this now before you expand is because setting up your business the right way can increase your value now rather than making adjustments to your business to add value later which will cost money.
4 Drivers that Increase the Value of Your Business
Having an international presence alone creates a net increase in your market exposure and a chance to sell to more people. Here are additional factors to consider before finding potential buyers:
Strong Organizational Development
Buyers are going to be paying attention to the strength of your people. This could include the valuable skill sets behind the people you’ve hired even the strength of your internal processes and governance for smooth business operations and compliance. If your company has high employee turnover or personnel are unclear that processes could have an impact on any due diligence exercise, issues may arise and be more work for a buyer to handle after they take over.
Quality of your Products/Services
Like the example we used for car insurance companies, focusing on the quality of your products or services is important for generating future revenue both through new and repeat customers. You may need to make adjustments to your product, business and/or operating model so that you are favored by customers compared to competitors, or simply focus on improving your customer service to keep people coming back.
“Risk” in business typically refers to whether or not your business is managed and governed well from a commercial, financial, tax and IP standpoint. The first question you’ll need to ask is whether or not your operating model (the framework that guides the behavior of employees to realize the strategy) is in alignment with your tax model (the internal and external transactions set up in an efficient way to reduce risk), and you’ll want to verify that key executives in charge of the strategy of your business are located in the jurisdictions in alignment with your transfer pricing policy.
You’ll also need legal protection over your IP (which could differ from jurisdiction to jurisdiction) which ensures that your business can grow without others taking and monetizing your ideas. A potential buyer will be looking to see if there are any potential risks like these, so you’ll need to clean this up beforehand.
These are a handful of topics you can look into to potentially increase the value of your business. And before you get started, one more step is to recognize that your focus will differ depending on whether or not you have a B2C model or a B2B model (more below).
Mismanaged money, certain kinds of debt, or complex systems are going to repel potential buyers. If your company has been using excel and your finances have been managed by multiple accountants over the course of time, you may need to clean up your books to assure investors that your financials are solid. One way you can improve your financials is to update your technology to minimize human error (or outsource to a third party like weConnect which has a team of experts and services that’ll last beyond your in-house accounting team turnover with global reach!).
Key Value Drivers for B2C Businesses
The key value to a B2C business is the brand and the alignment of the brand to the business activities.
For example, a company like Starbucks has strong brand recognition and customers know that they can get the same experience and coffee no matter which location they visit. Starbucks purchases beans in bulk with a discount on buying massive quantities and then sells coffee at a relatively high price, so they have IP in their buying power as well as in their procurement activity. They also have a set process for roasting and have set their key global business functions (like procurement of beans) up in tax-efficient jurisdictions so large amounts of profit can be taxed at lower rates.
Other ways a brand can be elevated are through increasing your social media following, and email list, or perhaps hiring influencers or celebrities to drive traffic to the brand and create trust through influence.
Key Value Drivers for B2B Businesses
B2B businesses do not necessarily have to have a well-known brand to hold high value in the way that B2C companies do. Companies that the masses have never heard of get sold all the time whose value drivers include technology or a value-add manufacturing plant, supply chain, intellectual property, assets (e.g. people), etc.
One example of this is a company like C3 Nano. No one has heard of it, but they are the company that makes the technology for flexible touchscreen phones. Their technology is incredibly valuable given how many phone manufacturers are looking at this technology to be able to manufacture cutting-edge, foldable-screen, mobile devices. In this way, with so many companies looking to incorporate their technology, they should focus on elements such as protecting their IP and ensuring their manufacturing and supply chains are efficient to increase their value. Feel free to reach out to us here!
Special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.
International Business Expansion Series
This article is part 15 of a 17-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad, from strategy to execution to management:
- The #1 Thing that Companies Need for a Successful Expansion Abroad
- The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
- How to James Bond Your Profit Margin with Location Analysis
- How to WIN in a New Market with These 6 Models of Execution
- Lost in Translation: How Culture Can Impact Your Business Expansion
- Show me the money: How to Fund Your Business Expansion Abroad
- Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy
- Avoid Being Taxed: How Tweaking the Structure of Your Organization Can Protect Your Bottom Line
- Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally
- 5 Reasons Why You Should Customize Your Technology for Your International Expansion
- Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications
- Landlocked: How your Transaction Flows can Impact Your Access to Funds
- 5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad
- “Health Checks”: Your Ticket to Building a Sustainable International Business
- How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
- Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad
- Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally