An established business which has a strong trade position, is well financed, well managed with depth in its management, good past earnings, highly predictable future earnings, good growth prospects and has good relationships with its customers and critical suppliers will command a value premium over businesses which only have some or perhaps none of these attributes.
In order to understand what improves value, it is first necessary to understand typically how valuations are determined. In summary, the value of a business is derived from discounting the estimated future income stream by the estimated risk that those streams will not be received at that level in the future.
Value is created by putting in place measures and processes which:
- Increase current profits
- Increase growth
Value will not be created by short term measures which only have a temporary impact on sustainable earnings. The elements of increasing sustainable profits include:
- Inclusive future revenues
- Getting the business in order
- Waste reduction
- Productivity improvement
Essentially growth is achieved by:
- Gaining more customers
- Existing customers using your products or services more frequently
- Each customer spending, on average, more per visit
- Providing new products or services to existing customers or asking the customer whether they would like a greater quantity for a discounted unit price
The operations value of a business is determined by two factors:
- The earnings/cash flows from the business; and
- The risk attaching to those earnings/cash flows.
Accordingly value is enhanced by:
- Increasing future earnings; and/or
- Decreasing risk.
Mechanisms which enhance value through enhancing future earnings and reducing risk include:
- Quality strategic and business plans
- Quality internal reporting systems
- Contracts/agreements with key executives/employees
- Suitable insurance policies on those key executives/employees
- Involvement in industry associations
- Customer care program to ensure relationships are enhanced and problems are identified and respond to appropriately.
- Contracts with clients and critical suppliers.
- Commercial and tax effective business structure
- Compliance with regulatory requirements
- Implementation of quality control and continuous improvement policies
- Active promotion of the business through industry events, local business groups and trade press.
The above-mentioned factors simply represent what is known by business valuers and indeed the broader commercial community as “good business”. To understand the value of your Hotel and the key drivers you can focus upon to enhance it, please contact one of our Hospitality specialists, Peter Maletz, Kim Hanrick or Tony Hunt, on 07 3218 3900.
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Published: 13 February 2020
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.