Building a Business is about Building Value
You’ll Make Better Decisions When You Know Its Value
Why did you go into business for yourself? Was it to provide for your family? To do something you love? To control your own destiny? Those are probably all true to an extent; but more than anything, you should be in business to increase its value. Business owners typically have 50 to 70 percent of their net worth tied up in their business – that’s a huge piece of your nest egg. A business valuation tells you how much your business is worth, and that number will help you manage your business. If you know the value, you can make better decisions along the journey. Let’s say you plan to one day sell your business for $5 million. Today, you find out your business is worth $1 million. The steps you will take to increase the value will be different than the ones you would take if you found out it was worth $4.5 million.
Know What Drives Value
With a business valuation, you will be able to identify the key drivers that will increase the value of your company. You will also be able to determine how measurable changes in these value drivers will affect the overall value. Value drivers vary by company, but they typically fall under one of these headings: strategy, systems or people. Here are a few of the most common value drivers:
Risk. Identify your key risk factors and lower them.
Growth. Ponder expenses in light of the potential effect on value.
Working capital. Manage your cash flow, trimming receivables and inventory if needed.
Margin. Know how much a 10 percent increase in margin impacts your value and use that knowledge when considering large investments.
Environment. Look at the quality of your management and keep your employees happy.
Positive changes to these drivers will impact your value, affect competitive performance, improve employee attitudes and increase customer satisfaction.
Enhance its Worth
Build a program around the basic areas that affect value. When it comes to people, the depth and quality of your management team matter. Be sure to establish good contractual ties with your key personnel for an immediate improvement to the bottom line. Many businesses fail because of weak financial records. Strong financial systems are critical in developing value. You have to know where you are to determine where you are going. Then you need to have a strategy. A company with a vision and a plan to get there is worth more than one without it.
Keep the End in Mind
When you know where your company stands and how you can increase its value, you can make better decisions when faced with changes in competition and economic conditions. But ultimately, it comes down to what you want out of life and your business. It’s never too soon to start planning your exit strategy. Simply beginning the succession planning process makes your company more valuable, as investors and lenders want to ensure the business will still be there when you exit. Owning a business is about freedom and responsibility. You will eventually leave your business, and it’s better to do so on your terms, before a life-changing event forces you out. Maintain control of the process and create a better foundation for decision-making. By identifying your value drivers and developing a plan to maximize value, you can improve your family’s quality of life and the future of the business you worked so hard to build.
Malahat Valuation Group is a multi-discipline valuation and appraisal practice, we work with business owners and their advisors to help them determine the value of the business and improve value over time by identifying the key value drivers of the enterprise.
Malahat Valuation Group