Posts tagged with: valuation
Every business owner intuitively has a sense for their metrics. When you identify those metrics and quantify them, magic happens. Your magic ‘operational dashboard’ that will transform your business is simply a listing of your business’ key metrics (your key performance metrics (KPI)). They are effective for many reasons.
GoDaddy CEO Bob Parsons, summed it up when he said,
“Measure everything of significance.
Anything that is measured and watched, improves.”
It’s simpler than you think. Make a list of your company’s key metrics. These become your personal ‘magic’ dashboard.
Simply by measuring something, it can improve. Draft your own operational dashboard to track performance and exactly how your business is performing overall. Start measuring performance against key metrics you need to hit or industry standards, financial standards, etc.
Everything that you track and measure will:
- Improve productivity
- Increase in value
- Demonstrate what was intangible value
- Provide the data to spot and fix problems faster
- Strengthen the core of your business
- Validate forecasts
- Increase the value of your business
Prove it to yourself. Pick 3 things significant to your bottom-line. Measure, watch and track them for 30 days. See what improves.
The fourth quarter is a perfect time to review, refine and revise the metrics you want to track and measure for the coming year to hit your numbers and achieve your goals. Don’t wait until January to start thinking about what you want to improve. Instead, make your plan, share it with your team and be ready to execute starting on January 2.
To ensure your company will survive and thrive and meet the demands of your market, customers and vendors, you must work on the business systematically and analytically to build value in every area. If you don’t know where to start or if you don’t know what metrics to track to improve your business, call 508.820.3322 or email us. You can also check out our 12 month program, Build Your Business Value.
Valuation is important at every stage of your business lifecycle. Owners assume it’s implicit in their revenue goals, growth goals, hiring and expanding. Instead, a formal tangible valuation is essential all along the way to keep your company on course. These five reasons are tied to the lifecycle of every business.
Ideally, if you follow Stephen Covey’s advice to ‘begin with the end in mind,’ you will perform your first valuation before you open your doors. This will give you a baseline for everything else you do. It also starts the habit of focusing on value, not just revenues.
As you grow your business, periodic valuations are a measure of how the market would value every area of your business. A valuation report will help direct you to focus on certain value drivers to achieve your objectives.
Consistent periodic valuations will help you measure your position in the market, your competition, as well as timing the best opportunity for your sale or exit. Basing your exit timing on objective third party reporting will guide you to make strategic decisions that give you more leverage in negotiations before you get to a transaction.
If your business is in decline for any reason and you have been conducting periodic valuations along the way, you will see the symptoms of that decline earlier, be in a position to respond and correct the situation to mitigate risk and damage.
The valuation process owners are familiar with is the one initiated by the intended buyer or acquirer. This valuation on its own, late in the game, is a wildcard – you don’t know what their business appraiser will discover, focus on or be concerned by. Any questions or concerns they find will (intentionally) discount the offer price or possibly derail the whole thing. But if you have a history of three or more periodic valuations:
- You won’t be surprised by anything they find, anything they ask for
- You will be better prepared for the process
- You will have uncovered and resolved every concern they could raise, beforehand.
- You will have your documents complete, up to date, accessible, in a format they seek
- You will fare much better through the process because you are prepared to be so forthcoming
- You will be in a position to support and defend the value you expect to command in the marketplace.
There are many different ways a business appraiser can value your business. In addition, a wide range of objectives also affect how the calculations are done. Be sure your periodic valuations are consistent in formula and objectives.
I don’t perform valuations, but I do help you build, track and measure the value drivers that will enhance your market valuation. Call 508.820.3322 or email us to discuss your unique situation.
If You Desire to Ever Sell, Scale or
Pass on Your Business for $10M+
You Can’t Afford to Wait.
You Need This Roadmap Now
November 6, 2014
This Way Out Group is offering a full-day interactive and practical session on building value in your business and a timeline of available exit options and strategies.
This 8 Figure Valuation Roadmap with Kerri Salls offers you a confidential personal assessment of your business’ value drivers relative to other companies. In addition, this one-day transformation immersion will give you insight, perspective, tools and a roadmap to:
- accelerate growth and
- maximize the value of your business now.
A limited number of Scholarship Discount Tickets are available until September 21.
See the Registration page for details.
VIP Master Pass Tickets offer extensive services and assets before, during and after the event.
Check out the Registration page now for details.
- Starting, growing, adding value and exit planning are an integrated continuum – all are essential to maximize value and monetize your business.
- You can better position your business for amazing growth and increasing value if you start with a plan
- An action plan that adds value to your business immediately and prepares you and your business to attract the highest valuation opportunities
- The roadmap to drive the process to a transaction to guarantee your transition to reinvention
- Identifying, communicating and testing your reinvention plans. Ensuring that your next venture, adventure, avocation or opportunity is even more engaging, compelling and fun than the business you let go
Along the way, we’ll address:
- Hard skills to maximize value and wealth
- Soft skills and expertise to monetize every asset
- Your Next Steps
The 8 Figure Valuation Roadmap is a fit if you are the Owner/CEO/President/Founder of businesses with current revenues up to $30M.
Whether you plan to monetize your business in the next 3-5 years or not for another 3 decades, this program is essential, now. Even if you only have an inkling of what that future looks like, you need this immersion training now.
This program is not suitable for experts, advisors or other company officers.
Seating is limited. Register early for Thursday, November 6, 2014.
Why This Seminar?
To guarantee you can cash out of your business
to cash in on that life beyond your business,
because of the value you can prove is in your business.
Wherever you are in your company lifecycle, start thinking now about the value of your company in the marketplace.
If you are a fast-track startup, showcasing your value and tracking your increasing value will make you a very attractive investment opportunity when you seek growth capital. If you are an established firm, clearly understanding the value you bring to the market will help position you as the most appealing acquisition/buy candidate in your space.
Value enhancement is not just a cleanup effort before the buyer’s appraiser comes in in the transaction process. Value enhancement is an overarching strategy to build a stronger, more robust company.
Here are 10 key questions to think through to maximize the value of your business.
- Who are your top 10 most profitable customers? Look at your 80/20 split.
- Who (what other customer) can move into your top 10 – if a client moves on/stops ordering?
- What new product or service could you add, break out as a paid add-on to increase revenue?
- What possibilities have you considered to accelerate your current business?
- Which (if any) of your sales are difficult to collect on? Identify those sales with high internal costs to get paid. Lower-cost orders/sales are less of a burden on the books/balance sheet.
- When do you identify customer complaints? When do you fix them?
- When was the last time you reviewed your pricing structure?
- Do you know who your top 20% of customers are? Why are they your top 20? Do you know your bottom 4%? Do you know what they cost you in time, staff, materials costs and goodwill, etc.?
- How current is your technology? Where should you update or upgrade technology to boost the bottom line?
- In your business model, what % of your sales is tied up as deferred income?
Your answers identify the numbers, activity and results that can provide value enhancement to your business now.
Most business owners and entrepreneurs work hard every day to grow their business. But are you focusing on growing the right things to make your business more valuable and sellable to your ideal buyer?
Do you know what buyers are looking for? Do you know what value drivers in your business, your ideal buyer will be looking for? Here are 5 areas where you can add business value just by what you focus on.
What makes you unique in your market? What do you do that your competitors don’t do or can’t do?
When your product or business model is hard for someone else to clone or copy, or you have built an enviable client-base, a buyer will pay a premium for what you have in place because it would cost them more in dollars, time and risk to reinvent your business.
Systems and Value
When a buyer closes the deal and buys your business, how easy will it be for him/her to step in and keep operations running smoothly?
Every system and process you document to run the business without you, can be monetized to add to your business value at the sale. Demonstrating that the business can run well with your team, your systems, and your procedures validates your position and gives you more leverage in negotiations. When you sell, can the business run consistently without your day-to-day oversight? Do you have contingency plans in place so that your team is prepared and can handle all key issues that may come up from time to time? Is your customer loyalty to the company and the brand or are they only tied to you and your personal relationship with them? Wean your clients off your personal relationship to demonstrated added value in the business.
You know the phrase, ‘you only get one chance to make a good first impression’. When it comes to buyers considering acquiring your business, that curb appeal typically starts with your financials. Before a buyer will pursue the deal any further, they will want to review your financial statements and forecasts thoroughly. They are looking for clean up to date books. Beyond those basics, they are looking for a track record of growing both revenues and profits. Anything less gives them an argument to reduce the valuation of your business. Do whatever it takes to clean up the books, keep them current and strong and demonstrate growing business value in both revenues and profits.
Look at your customer base. What is the distribution of revenues among clients? Are your sales distributed across a wide base or concentrated in a small number of preferred clients? Is your client database current or out of date with lots of former clients still listed? A business appraiser will recognize and monetize a good, strong, clean database as an intangible asset to be valued in the sale price.
Acquirers will review and analyze your customer database to determine how stable sales are, the lifetime value of each client, the lifecycle of each client, and to determine their retention rate after the acquisition.
Future Growth Potential
A buyer’s due diligence is quite invasive – especially in a privately held business where this level of detail and these documents have been held close for years or even decades. Buyers are simply identifying the risks they’ll incur for the price they are willing to pay. Buyers want good odds that they’ll not only breakeven after the sale but indeed sustain growth to increase their returns from future growth. Always be prepared to demonstrate a track record of achieving milestones and how you consistently hit your projections, to build confidence in future growth potential.
If you prepare your business all along the way to be buyer ready and buyer attractive, you will know the range of business value that it is worth in the market and that you would consider, before any buyer or acquirer comes knocking. When you are always building business value to make it saleable, you gain more leverage and can command a premium price.
If you would like to establish value drivers in every area of your business to grow your business value, check out this one year program.
When you want to sell your business, you want to command the highest possible value. For your business to merit the highest valuation, you must prove to the business appraiser and your prospective buyer that the value is in your business, not in you the owner. That means transforming you as an Operational President to become a Strategic CEO.
To start and launch a successful business, it is common for the owner/founder to ‘do whatever it takes’ to make it happen. That drive and commitment to move the business forward is essential to achieve your goals and objectives.
The control to achieve your goals and projections is often concentrated in you the owner, acting as the operational president. However, this must change for you to successfully transition out of the business and be compensated for the true worth of the business. Letting go of day-to-day operations is a tall order for many owners. To become a more strategic CEO and demonstrate that the business value is in the business itself, here are some suggestions to work yourself out of any day-to-day operational role:
- Create systems for everything. If you have systems, be sure they are documented. Document everything you do for the business (for every hat you wear). Anything that can be systematized and is repeatable can now be assigned to someone else. Once documented it can be assigned to someone else and come off your plate.
- Delegate everything. When your business can operate day-in and day-out without your hands-on oversight, you have a money-making machine that will attract buyers. This one change takes time, not days or weeks, but years. Identify the three things you absolutely love to do in your business and the three things only you can do. Delegate the rest. Be vigilant.
- Develop a succession plan throughout the company. Succession is not just for family businesses. Target and create a succession plan for your top people in every department and at every level. Groom them for the next step up and two steps up at all times. By building depth within the business, you add value for the buyer and secure their long term employment even under new ownership.
- Plan for scalability. Any business that is scalable has more value. Demonstrate that you are scaling successfully, even before the sale; now your business model can command even greater value.
When you apply these four suggestions diligently, you will work yourself out of the job of Operational President. You will free up your time to be a Strategic CEO and to focus on the things you love and what only you can do to grow your business to make it both buyer ready and buyer attractive.
Our new program, Build Your Business Value, helps you enhance the value of your business with 48 value drivers in 12 areas while improving your strategic position in the market.
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.
Lisa Magloff’s article in Small Business Chron, How do I Create Business Value? is a good introduction to the concept of what constitutes value in your business. As she says, ‘It’s more than simply economic value.’ Business value comes from both tangible and intangible assets. To add business value, Magloff outlines five steps. Here are her five steps and my comments.
- Make and keep realistic promises on service, quality and delivery.
This is a great example of intangible business value. Do it well and it will measurably add value to your business. In addition it will result in higher standards of performance and productivity which will produce higher profits. But if you don’t keep these promises to employees, vendors or customers, that intangible value can slide quickly.
- Use information technology to create business value.
Business owners who grew up with technology see how obvious this is. Owners in fields where technology was not available when they built their business can’t see the value yet, because they still need to invest in the technology to make their business viable for the next generation. Technology adds both tangible and intangible value to the business. It can speed up and simplify transactions, and help the business improve overall results.
- Develop and encourage effective decision making practices by employees
Training and support to allow employees to take control of day-to-day decisions on their projects, helps retain them, increases their value to the business, strengthens the depth of management, and distributes responsibility throughout the organization. It prepares employees for advancement and even succession. It also frees up the owner/entrepreneur for more strategic challenges and opportunities while demonstrating that the value of the business is in the business, not in the owner.
- Strengthen your core competencies by investing in development and spending more time and money on those areas that are most important to your long-term success and growth.
To leverage the full value of your business for an acquisition or sale opportunity, it is essential to be aware of your unique strengths to position every asset you have for optimum value. If your biggest asset is your team, invest in them so they committed to stay. If your biggest asset is the process to develop and launch new products ahead of the competition, invest in that, protect it and highlight the value you can monetize just from that.
- Increase your business value by building capability within your business
Capacity building can be achieved in many ways. It depends on your objective and long term goals. Adding employees is one way, but that’s not just about hiring. Once you add employees, you need to nurture them with training and knowledge to cultivate innovation to continually add value to the business. Capacity building can be about your brand and market perception of your value. It can also be about the right technology or adding technology to support increased capacity to serve the market. Every one of these approaches to build capacity sets up your business to grow, increase revenue, and add value to the bottom-line.
Creating business value is a process. Systematically building both tangible and intangible value will position you better for a sale or acquisition on your terms, on your timeline.