Posts tagged with: build business value
As the owner of your business, you always have more to do than you have time to do it. You always have more to do than hands to get it all done. So when any of your outside advisors suggests starting early on anything strategic, be it wealth planning, estate planning, contingency planning, long-term tax planning, even goals and strategies to grow your business; the urgency isn’t always obvious.
Compared to product and service delivery, customer satisfaction and controlling costs, it is very challenging to find time to focus on and execute strategic projects and changes to build value into the business. The ROI on the time and effort required to build business value is years if not decades in the future.
Here are a few reasons disguised as incentives that may tempt you carve out the time and commitment to build business value now.
- Start focusing on what will increase business value, not just revenue. This will give you a longer lead-time to leverage and compound that increasing value.
- Prioritize working on the business, specifically to add value. This will lead to stronger results on the top line and the bottom line over time.
- Transfer operational responsibility to your team. This will free you up for more strategic efforts and demonstrate the value of your business is in the business, not tied up in you the owner.
- Build strong deep fundamentals in every area of your business. This will provide proof of what you know the business is worth, adding leverage in any transaction negotiation.
- Timing is everything. Run your company with clean books, up to date governance agreements and documents, with systems and processes in place to drive growth. Consequently, your business will always be ready and will ‘show better’ to any potential buyer (solicited or unsolicited).
When you apply value drivers in every area of your business, consistently reinforce them, and track the impact, then the positive compounding effect on Net Profit and Valuation is dramatic.
That doesn’t happen overnight or by itself. It takes time to build business value so you can harvest the wealth tied up in your investment in your business.
Check out our systematic approach here. Build Your Business Value is a 12 month program to set you up to add value in every area of your business.
When you started your business, you were more likely paying attention to the value of your product and services to command a good price. At the same time, you probably were not focusing on what would add value to the business itself.
When it comes time to monetize your business, like when you want to sell off equity or find a buyer; that’s when value becomes a serious criteria in your decision process. That’s because value plays a big part in the price anyone will pay for an ownership position in your company. But as Chris Mellon of Delphi Valuations cautioned when I interviewed him on Exit This Way: “Business value does not equal price”.
Value is commonly discussed as if you’ll execute a cash transaction. But other options such as stock transfers, notes, or earn outs with contingencies, are often involved.
A business appraiser does not know the terms of the deal that will determine the price a buyer will pay for your business. Your valuation expert will look at the overall market assuming a cash transaction to come to a value or rather a range of values. It’s called a continuum of value. For example, a business may be worth somewhere between $7M and $13M and that range will vary for different purposes. Fair Market Value (Fair Value) is somewhere in between.
Why have your business valued?
Maybe you will get a business appraisal for compliance such as in financial reporting or litigation even in shareholder disputes or a divorce; or strategic planning, such as exit planning; or for an acquisition or sale.
Business and personal situations vary. You want to consider the value of your business in your overall decision making process, as a business owner but also in terms of its value in your portfolio.
Then there are also the tax implications for various decisions that can prompt getting a valuation of your business. Three common tax reasons that can drive a valuation are to: assess gift taxes, determine estate taxes, or when you convert a C corporation to an S corporation.
When should you have your business valued?
If you are starting your business on the fast-track to an exit (a targeted acquisition or an IPO), you will want to have a valuation performed early as a benchmark.
Beyond the startup phase, most businesses will benefit from having a valuation performed regularly, even yearly in the 3-5 years leading up to your exit transaction. The valuation exercise will reveal enhancements, improvements, growth, and metrics which will demonstrate a pattern of building business value. In turn that sequence of valuations will give a seller significant leverage in any negotiations in any 3rd party transaction. Businesses put themselves at a disadvantage if they pinch pennies and expect to only go through valuation once, when they are already talking to their prospective buyer.
Building business value goes hand in glove with exit planning to achieve your objectives in the business and beyond. Valuation is an exercise to measure the return on your efforts.