Friday, August 12, 2016

Do You Know What Your Company is Worth?

Good insights from John Carvalho from Divestopedia

Do you know the value of your business? When I asked this question to business owners in attendance at a presentation I recently delivered, I was not surprised the majority weren’t 100 percent sure. Why should they care about value? No one ever asks for it. Banks, shareholders and government agencies never ask private business owners what their company is worth.
In reality, though, there are a lot of different stakeholders valuing your business every day, such as your employees, other banks, investors and customers. I would venture to guess that that alone should be a good enough reason to care about value.

What Buyers Look for in a Business

I recently found myself watching NBC’s "Shark Tank," where aspiring entrepreneurs pitch their business concepts and products to a panel of business moguls who have the cash and the know-how to make it happen. Hands down, the fastest way to get thrown out of the tank is to have an unrealistic valuation of your business.

So, think about it this way: If you had your eye on an acquisition, what would you look for? Putting yourself in a buyer's shoes is a great exercise to temper valuation expectations. I bet you would be looking for things like a diversified customer base, a systematic way of generating recurring revenue, barriers to entry from competitors and high margins, to name a few. So, be honest: Does your company have these characteristics?

Great Companies Drive Value

If building a company was a sport, the value of the company would be how we keep score. Jim Collins, author of "Good to Great," identified elite companies that have made the leap from good to great. Companies that make the leap were defined as meeting the following criteria:
  • 15-year cumulative stock returns at or below the general stock market
  • Followed by a transition point
  • Then cumulative returns of at least three times the market value over the next 15 years
What this suggests is that measuring corporate value is a key tool in tracking a company’s transition from good to great.

The Benefits of Regularly Updated Business Valuations

For me, the same question always come to mind: Why haven’t valuations become more commonly adopted as a strategic planning tool for private businesses? Every year, companies engage accounting firms to audit, review or compile their books. This requirement is driven by banks, tax authorities and others that require financial statements verified by an independent third party. I truly believe that an annual valuation would provide most business owners with more insight into their company than audited financial statements.

As I see it, the benefits of using periodic business valuations as a strategic planning tool are:
  • Business valuation provides business owners with a quantitative measure of the corporate value created through the execution of a strategic plan.
  • Frequent business valuations will give owners a better understanding of which financial levers they can pull to drive the value of their business.
  • Like in "Shark Tank," knowing the value of the business gives owners increased credibility with potential investors and lenders.

A Better Valuation Tool

Here are my thoughts on a better valuation model compared to traditional valuations currently offered by most advisors:

Traditional Valuation:
  • Based primarily on financial information;
  • Only provides a value of the business at one point in time;
  • Limited recommendations on how to increase value; and
  • Engagement is over once a value is determined.
A Better Valuation Model:
  • Digs deeper into key market and operational value drivers of the business;
  • Current valuation sets a benchmark and provides a comparison to where you want to be;
  • Provides a clear understanding of strengths and weaknesses in the business, plus recommendations on how to improve; and
  • Determining the value of the business is just the beginning. The engagement provides constant monitoring and measurement of value to help business owners achieve wealth creation goals.
So, my question to you, private business owner, is a crucial one: How can you know if you are moving toward greatness if you don’t know or frequently measure the worth of your business?

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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