Always Keep Your Eye On Your Business's Value
No one owns a car forever. At some point, it changes hands. The same applies to your business – at some point, one way or another, it will change hands. Why then do entrepreneurs lose sight of the resale value of their business?
Growing a business can be tough. Cash flow pressures, staff issues, supplier disputes and competitive forces all demand attention all the time.
But at the end of the day, the goal is to build a business that will be sold. Keeping a close eye on the value of your business needs to remain a priority.
A crucially important number
Many business owners may draw a salary from their business. For these people, the value of the business may not seem like an important consideration.
But even where the ability to draw a salary is a more apparent immediate concern, the value of the business itself impacts your financial stability, your estate plan, your tax position and can actually form a significant component of your ability to retire comfortably.
Even those that are more aware of the value of their shares in the business may find themselves preoccupied with turnover, profit margins, leverage ratios and dividend yields.
Every car owner has at least a rough sense of the potential resale value of their car. They know that they’ll be getting a new car in the future (nothing lasts forever), so it makes sense to keep a view of the resale value alongside other metrics, like fuel economy or service costs.
Related: Build a Business of Value
Similarly, a property’s resale value is usually kept close on hand, just in case an opportunity presents itself to crystallize some growth or upgrade to a better property.
The right metrics
Each business will have a set of core metrics that are worth regular and detailed scrutiny. For some, this may be sales volumes and margin, while for others it may be stock retention and accounts payable periods.
These can vary by industry, geography, or even just the life stage of the business.
For a shareholder in any sort of business, the value of the shares is a vital number. It doesn’t matter what the industry, geography or life stage, keeping an eye on the value of those shares and planning for projected growth, dividends and corporate actions is of critical importance.
To get the value, don’t add – integrate
Simply adding a business valuation to part of the regular reporting and management is certainly one way to create the visibility and to keep the business value in shareholders’ line of sight.
But this may not be very effective at getting the most ‘value’ from your value.
Rather, integrate the business valuation into the strategy, planning and reporting cycles. Ensure that management understand both what the business value represents as well as how to influence the number.
Understanding the dynamics of this number can be a valuable tool in planning and decision-making.
For example, a period of expansion and investment may place downward pressure on a valuation in the short term, but shareholders will certainly be able to interpret an upswing in business value when it pays off.
The value of the right partner
The right valuation provider here can be critical. A valuation should be tailored to the nature of the business, its industry and its value drivers.
Without the right valuation and the right team providing updated valuations, a business may find itself incentivizing the wrong decisions.
For example, a valuation based on earnings multiples would encourage different actions to one based on discounted cash flows.
Having valuation provider that can assist with integrating the valuation into the business’ operations, reporting and decision-making structures can be invaluable. Make sure to find a partner that can deliver the best value for your value.
Gareth Watson is an actuary, consultant and co-founder of iBizValue, a firm specialising in business valuations and corporate finance projects for small to medium companies. Having worked at both large and small multi-national companies, Gareth has developed a keen insight into the value drivers for a range of businesses. Contact Gareth at firstname.lastname@example.org.