The Capital Value Equation: What is it?
Turnover and profitability are often cited as the key determinants of a company’s health; but our research shows that there’s a less-publicised measure which is even more important.
That metric is ‘capital value’ (also known as shareholder value). We believe that it is a concept that should be close to the heart of every business owner. It describes the potential value of their business on the open market, or indeed, how much it may be worth to the next generation if passed on in a succession plan.
What is Capital Value?
To set the scene, the capital value of a business is a measure of how much it is worth at any given moment. However it can mean a lot more than just this – businesses with a greater capital value are likely to have improved access to finance, be performing well against their competitors, and more likely to strengthen the value of their brand; which, in turn, can increase market share.
A recent pan-European survey conducted by Mazars found that 72% of Mid-Market and Entrepreneurial business owners believe long term capital value should be a priority for their company. However, only 23% stated that their daily activities are dictated by their efforts to enhance capital value.
For ambitious business owners, there is a huge amount that can be done to improve this vital metric on a daily basis.
What is it not?
It is important to note that capital value is not just a reflection of a company’s profitability: instead it factors in a broad range of characteristics, including market sentiment, the quality of its assets, its financial performance, the level of debt and even the type of customers it has. Factors such as being over-reliant on one large customer can bring the value down, whereas positive factors such as owning the intellectual property associated with goods/services can increase it.
And that’s not all. There are also several key drivers to add into the mix, such as the strength of the management team, the quality of the product offering, market position, the efficiency of the business operations and the primary business model operated. These act to magnify the effect of the factors already in place, and the difference they make to the total capital value calculation can be staggering.
The Mazars Capital Value Equation
We have termed this the Mazars Capital Value Equation:
Once all of these factors have been considered, the variance in the capital value calculated of similar sized companies, operating in similar industries, can be significant. This 'capital value gap' can run into millions over the life of a business owner: and be the difference between long-term sustainable success, and simply treading water.