Value Driver #1: Business Structure

Value Drivers are elements of a business that reduce risk and improve returns. In order to build the value of a business you must understand what  business valuation experts believe justify a premium price. There are two types of business drivers:  generic (common to all industries) and industry specific.  We have planned a series of articles to introduce you to the most important generic business drivers:

• Business Structure
  
• Strategic Financial Planning
• Internal Operating Systems and Procedures
• Human Resources
• Financial Management
• Benchmarking and measuring success

This month we will talk about business structure, and how it can affect a business’ value. Business structure is the foundation upon which everything else is built, and without sound structures in place, risk goes up while value goes down. There are three main components of business structure:

1. Corporate Documents
2. Organizational Structure
3. Competition

Corporate Documents

Your corporate documents must be maintained and in order at all times. Documents can serve as signed agreements that describe how the business will operate. If  the company has multiple shareholders, the rights and responsibilities of each shareholder should be clearly documented in order to avoid misunderstandings.

You can minimize risk by maintaining documents that are applicable to your business such as:

• shareholder agreements
• buy/sell agreements,
• by-laws  
• operating agreements

These documents should clearly state  how the company will address various situations as they occur.  For example, what will the company do if one of the shareholders becomes ill or passes away? Having a plan -- in the form of corporate documents -- lowers risk and raises the value of a business.    

Organization Structure

Creating an organization flow chart -- also known as process charting, workflow charting or business process mapping -- defines what a business entity does, who is responsible for specific tasks, to what standard the business process is to be completed, and how the process can be measured to determine success or failure. If only the owner knows who should be doing what, the value of business decreases because it is unlikely that the business could continue without the owner.

The functions represented in the chart can consist of sales and marketing, human resources, shipping and receiving, manufacturing, inventory, accounting and finance, and purchasing. Each business function should flow seamlessly to the next business function throughout the organization and should be completely understood by management and employees alike to maximize the efficiency of operations and to minimize the risk of loss.

Competition

You should know your industry and know who your competitors are, both directly and indirectly. Once you have that understanding (through research) you need to formulate documented plans to deal with competitors. The execution of a well thought out plan will reduce risk of loss due to competition.