The 4 key qualitative aspects to increase the value of my business

It is common to use mainly quantitative variables, rather than qualitative aspects, to define the valuation level of a company. As the investor actually buys future expectations, ratios such as historical sales growth and EBITDA margin on sales are recurrently taken into account in valuations both in the DFC method as in the Valuations per Multiple. 

In this article, we would like to highlight the qualitative aspects that investors take into account when analysing the risk of a company and which are as important as financial ones. Taking these variables into account is of vital importance when defining your Growth Plan and thus maximise the future value of your company in the medium term. There are four critical qualitative aspects:

1. The Quality of Revenues
2. Talent Qualification
3. The Competitive Position
4. IP & Business Model

1. The Quality of Incomes

Regarding the first of the qualitative aspects, it is essential to reinforce those variables that improve the predictability and future assurance of income and show strength in growth capacities.  

• Customer concentration: A greater diversification of income among different customers means a reduction of risk and dependence on one source of income. Investors therefore reward this with a higher valuation. 

• New customer registrations: A greater capacity to add new customers reflects a greater capacity for revenue growth. Therefore, investors buying into future expectations are willing to pay more for a company with greater capacity for growth.  
• Upselling/Crossselling: Once in business with a customer, upselling involves growing sales with that customer over time. Investors are willing to pay more for a company because it means the ability to grow with less commercial effort.  
• Customer deregistrations: A company that loses customers reflects a problem in supply or competitive position. Therefore, investors penalise companies with high churn rates as they perceive a higher risk, which is one of the qualitative aspects to be taken into account.  
• "Customer downselling: Una vez iniciada la actividad con un cliente, el “downselling” supone el descenso del nivel de ventas con ese cliente a lo largo del tiempo. Los inversores penalizan esta tendencia por suponer una mayor incertidumbre sobre las ventas futuras.  

2. Talent Qualification

With regard to the second qualitative aspect, knowledge-based companies have their main asset in the people who make up their organisation. A good team helps the investor to perceive a greater capacity to overcome the challenges presented by the market:  

• Talent Retention: is considered to be one of the most important qualitative aspects. Investors attach great importance to the talent retentionespecially the one considered key after the transaction. Therefore, a high level of turnover increases the risk and is penalised in the valuation.  
• Qualifications and experience: Los inversores consideran positivamente la cualificación y la experiencia como factores para poder aportar un diferencial al cliente y como la capacidad de adecuarse a los retos futuros del mercado. Afectan elementos como el  nivel de certificación, los sistemas internos de formación, etc.  
• Sales and Marketing: The team in charge of incoming revenues is key to future development. The investor rewards the degree of professionalisation of this department and the degree of linkage. For example, variable remuneration systems are valued and non-exclusive external agent systems are penalised.  
• Professionalisation of HR: In an IT services company, the main value lies in the people and their capacity for development. Therefore, investors positively value companies that have professionalised this function by developing career plans, training systems, job profiles, performance evaluation, remuneration systems, etc. 

3. Competitive Position

As for the third of the qualitative aspects, the analysis of the opportunity must always be analysed in a competitive context and must weigh its advantage relative to the difference with the competition. In this sense, we recommend carrying out the analysis from two points of view:  

• Financial: comparando los principales términos financieros con los de la competencia. En una primera aproximación analizamos el crecimiento histórico, la rentabilidad, el tamaño relativo y el nivel de solvencia.  
• Market proposal: It is very difficult to generalise on this point and will depend on each sector. It is useful to include in the comparative analysis those qualitative aspects and other variables that the customer uses to decide which offer to choose.

4. IP & Business Model 

With regard to the last of the qualitative aspects, this point is of vital importance because it depends to a large extent on the level of engagement or exit barrier that the customer has and, therefore, on the degree of uncertainty about future sales: 

• Product vs. Service: en la escala más baja de valor relativo están las empresa que solo ofrecen servicio  y en la escala más alta las empresas que ofrecen un “Software as a service” en la que el cliente tiene que pagar la suscripción si quiere seguir usando la aplicación. Puntos intermedios están el mantenimiento recurrente o las licencias perpetuas.   
• Value chain position:  whether the product is proprietary or relies on a third party manufacturer, whether the company's role is as a distributor, implementer or developer, all of these are variables that affect the value of the company.

Improving the value of your company is not a task of today for tomorrow, it requires a prior diagnosis and a well targeted growth plan. At Baker Tilly we can walk this path together. We do this on a daily basis with our clients.  

Download the complete guide to company valuations here: