Preparing for Valuation Due Diligence: How Much Value is Placed on a Business’ New Opportunities?

May 20, 2020
 Minute Read

Business owners are often on the lookout for strategic opportunities to grow or scale their businesses. For some, these opportunities show up because of changing industry trends or new regulations. Sometimes, these opportunities are created through strategic relationships with other companies.

If a buyer, investor or lender are considering these opportunities as an addition to the business value, it’s helpful to know what they’re looking for and how they value these kinds of opportunities.

So how can a company know how much value to apply to the opportunity they uncover? There’s a simple set of steps to work through that may provide an increase in value from the eyes of such third-party due diligence.

As an example, the owners of a multi-million-dollar manufacturing company were surprised at the low value attached to all the opportunities they saw for their business.  

During the analysis process for their TEVO® Score Value Bridge Assessment, they were asked if there were opportunities for growth they were looking at for their business. They excitedly shared all of the things that a buyer could do if they took over their business. They listed many different ideas, about a dozen of them actually. All of them seemed viable; all of them seemed clever.

However, the company scored really low in the Growth & Opportunity section. In fact, it was their lowest scoring section of the assessment.  

It was clear that there was plenty of potential for this business. But that was it – it was just potential. None of their ideas had any details, analysis or planning. They were only in the idea stage, which doesn’t carry a lot of value for someone looking to buy their business.

An idea is not worth much to a buyer, but an idea with a plan can actually carry value.

In the TEVO® Score assessments, the Growth & Opportunity section measures 5 different components:

-      Opportunities to grow revenue

-      Opportunities to improve margins

-      Strategic Opportunities with third-parties

-      Scalability

-      Product Extension/Revenue Diversification

For each of these 5 components, any opportunity for that company will be scored initially based on how detailed the plan is for that idea. Is it a brand new idea? Has there been any research done? Is there any sort of plan in place? An analysis of vendors? Systems or equipment needed? Is there a budget, projected costs, or expected revenue? Is there a timeline set for when it’s supposed to happen? Is there a team in place to execute? Will new people need to be hired? What’s the expected timeframe to breakeven? How much upside can be expected?

Essentially, someone looking to value your business will feel more comfortable paying more for a fully detailed plan of an opportunity. Think of it as a mini business plan for that opportunity. It helps the outsider to understand what it will take to implement and what the potential upside is if it succeeds.  

The Growth & Opportunity section of the TEVO® Score’s Value Bridge Assessment can be worth anywhere from 17%-24% of a company’s score, which is a significant portion of the overall value. It’s worth it to understand what this section is analyzing.

And why should you care about your company’s TEVO® Score?Because it is the direct indicator of a company’s multiple, so the higher the TEVO® Score, the greater the company value.

So, consider what opportunities you might be placing value on in your company and set a plan to set a plan. Even if you’re not planning to sell, it’s that level of ‘homework’ that may ensure the opportunity truly pays off.

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