At some point in a business owner’s adventure, thoughts will inevitably turn to planning for an exit. For some owners, this is something that starts early, perhaps even as they’re starting their business. Which is great. For others, it’s a last-minute thing. Maybe not so great…
Regardless of the timing, owners will contemplate two key questions. The first is about the form their exit will take. That could be a trade sale, public listing, sale to family members or management team or some other arrangement.
The second question is about preparing the business for sale and as part of that, how to maximise the value of their business. In the minds of many (perhaps most) owners, it’s this question that’s far more pressing.
Typically, this involves thinking about how to keep expenses down and revenues up in the lead up to the time a value is placed on the business.
In this regard it’s easy to argue that keeping a lid on expenses is rather more straightforward than maintaining and increasing revenues. We’d also suggest that in order to maximise enterprise value, business owners would be wise to do everything they can to demonstrate the sustainability of, and potential for growth in, their revenue lines.
Demonstrating potential in your business
We believe, and evidence suggests, that one way to do this is through clarity of purpose. A purpose, beyond making money, that is deeply embedded in the business and which is part of its DNA. Why? Simply because customers are more loyal and employees more engaged in businesses that are purpose-driven.
We spoke with Liz Smith, Director at William Buck for her views on the importance of purpose when it comes to business valuations.
Liz says there are three things that really drive enterprise value, “cash flows, growth and risk. Having clarity of purpose can add value in each of these areas.”
She agrees that purpose helps bolster customer loyalty and employee engagement. “Higher profits (and therefore greater cash flows) can be generated if you have customer loyalty.” This can translate to repeat revenue and higher margins.
Strong employee engagement often leads to “greater productivity for the same level of fixed costs”, because employees are willing to contribute discretionary effort. Liz adds:
“higher customer and employee retention also contribute positively
to the bottom line.”
On the impact of purpose on growth, Liz says, “it can be easier to attract customers and build brand value when you can explain your why.” In other words, when your business can articulate its purpose and, most importantly, demonstrate commitment to it.
Likewise, clarity of purpose, “arguably reduces risk” because of a reduced likelihood of losing key customers or employees.
In summary, Liz says, businesses that “achieve the highest prices tend to have a strong brand name…that provides competitive advantage and enables higher prices to be charged. A clear purpose can help a company build a strong brand name in its chosen market.” It’s a view that global research absolutely confirms.
So, if the connection is obvious...
You’d think if all this is true, both business owners and potential purchasers would be all over purpose as a value driver.
We speak to businesses day in, day out, and although there’s widespread recognition of the benefits that come from being purpose-driven, many owners find it difficult to make the transformation. Research out of the US by Carol Cone (2020) also hints at this, finding that while 86% of businesses surveyed recognise purpose as important to growth (and therefore enterprise value) only 24% said purpose is embedded in their business.
Locally, Liz Smith says she’s not seen any strong evidence that prospective purchasers take a strong view on how target businesses rate on purpose. Not directly at least. Liz says that because purchasers look for growth potential, “they’re looking for businesses that have a sustainable competitive advantage and this can come from having a clearly differentiated brand or purpose.”
It’s an odd equation – both business owners and prospective purchasers seem to agree either directly or by inference that purpose is important. Yet owners largely remain in a state of inertia on the subject.
It's all about mindset
We suspect that’s because a fundamental change in mindset is needed in order to fully transform and become a truly purpose-driven business. It’s hard for business owners not to focus the bulk of their attention on the financials of their business and it becomes doubly hard when they’re preparing their business for their eventual exit. Hard, but not impossible.
The graphic below shows the difference between the financially-driven approach to business and the purpose-driven approach.
One of our fundamental beliefs is that financial outcomes in a business are exactly that – an outcome of everything else that happens in a business.
The “everything else” includes:
Loyal, repeat customers buying the products/services you’re great at supplying; and,
Highly engaged employees delivering “discretionary effort”.
To get the ball rolling...
To make the shift and become truly purpose-driven, there needs to be a deliberate and planned effort. Businesses need to:
Be clear about why their business exists beyond financial motivations;
Have a plan about how to embed that purpose inside and outside the business;
Focus on the right internal and external messaging;
Ensure that purpose becomes the validation for everything the business does.
None of this can be done overnight so in the context of exit planning the time to really focus on purpose is now.
Liz Smith from William Buck has seen “a number of businesses achieve significant revenue and profitability growth rates (and high exit valuation multiples as a consequence) from having a clear purpose…it’s about identifying what your market needs or wants and responding accordingly.”
There’s little doubt that purpose can help drive profitable, loyal customers to your door and provide an engaging environment for employees. The challenge to make it happens sits squarely with business owners and their leadership teams.
Can you make it happen in your business? Can you truly afford not to?
How strong is purpose in your business?
We'd of course welcome the opportunity to discuss your needs with you and invite you to contact us to arrange a meeting - face-to-face or virtual.
If you're keen for some immediate feedback on the strength of purpose in your business, please follow the link to our "Strength of Purpose Health Check".
It'll take you no more than three minutes to complete and you'll get your results instantly.
Why not subscribe?
If you want to make sure you never miss an update from us, please provide your details on our Insights page. We'll add you to our list!
You can also follow us on LinkedIn.