The primary aim of any business should be value creation. Value is created when customers choose your products and services over other brands in the marketplace.
Everyone contributing to your business perceives its value differently. In simple terms, value refers to the positives that highlight your brand in the market. When a company builds products and services that customers purchase, it earns a profit that benefits the business, and the customers receive what is valuable to them.
A well-trained and motivated workforce is critical to a company’s success. Not surprisingly, if long-serving employees remain with the company after it’s sold, its purchase price will reflect that.
The Origin of Value Creation: Defining Point A
Business owners often overestimate the actual value of their business. Still, they have a target value at which they want to sell their business based on post-retirement personal and business goals. Therefore, the difference between the actual value and the value they wish to sell is the gap they must fill before selling the business. It is essential to know the company’s baseline value, which is its accurate value now. For owners, this is the starting point (point A) that defines where they need to go and how to reach their end goal (point B).
To understand this better, let’s use the following example. Before beginning an exercise program, you should get a health check-up performed by a doctor. Similarly, valuations are the health check-ups a company needs before moving forward with a value creation program. These valuations help identify the risks and challenges a department might possess and direct corrective action. Timely action can improve productivity and eliminate the chances of losing time and resources.
Economic factors may invite challenges; no two years may be the same. But when you have a baseline value, you know the initial point from where you can rise and fall. Therefore, consider a valuation as a regular health check-up for your business.
Let’s look at this another way. If you wish to travel from Houston to New York City, you need to estimate the trip’s time, fuel, and overall cost. Without an initial starting point, you cannot estimate those factors. Similarly, a business owner needs to know the initial value—point A—to determine the target value—point B—to plan their exit.
The Right Valuation Approach
A business valuation determines your company’s current value in the market. From that data point, you can estimate its potential over a specific period of time. A business valuation shows you the quantitative and qualitative factors affecting your business.
The asset, market, and income approaches are the three main valuation methods. These methods measure a company’s worth differently, but they all aim to arrive at an accurate figure. To determine business value, analysts often utilize one or more methods.
Choosing the right approach for your business significantly impacts the return on your investment until you exit. Each business is unique and requires a distinct approach to valuation. The companies with the best valuations utilize a combination of methods to determine their worth.
Benefits of Business Valuation
Building a successful company hinges on its production of value. Business value is created when a company’s growth is sustainable and lucrative.
- Understand your assets: A business owner needs an accurate appraisal of the company’s tangible and intangible assets. Estimates are unacceptable because they might be interpreted as generalizations. Business owners know how much to reinvest in the company and how much to sell it by comprehending a more accurate financial number or a range of values derived through valuation techniques. Intangible assets play a very important part in valuation. However, as they are non-physical (e.g., goodwill, copyrights, and patents), owners must connect with a financial advisor to calculate their accurate values.
- Know your resale value: You may also negotiate a better selling price if you know your company’s resale worth. A valuation expert provides information regarding similar sales to help you reinforce your position on the higher selling price.
- Track your valuation growth and income: Every business owner has an estimate of how much their company is worth based on market data. A business valuation study can highlight areas of your company where you should concentrate your efforts to make it more marketable and lucrative.
- Don’t get tricked: With a business valuation, you’ll know how much your company is worth and be able to negotiate the acquisition price by demonstrating a continuous trend in increasing value through the yearly business valuation process.
If you know that your company’s value is more than what is being offered to you, reject that proposal. This might assist both parties in reaching an amicable solution.
Create Value for Employees, Customers, and Investors: Going from A to B
Value is different for everyone and follows a circular path.
For customers, it is receiving good quality services and support. They expect innovative products and are likely to stay if you understand and meet their needs in a timely manner.
Employees must receive value to be motivated to give their all to meet the company’s overall objectives. Their value includes respect, appreciation, inclusion in decision-making processes, excellent compensation, meaningful work, and ongoing development and training.
Creating value for investors entails constantly providing solid returns on their cash. This needs high sales growth and favorable profit margins. This is only possible if a company provides customers with long-term value.
Sell at Your Desired Value: Reaching Point B
We know how we need a baseline value to reach our end goal: selling the company for a profitable exit, point B. To reach point B, we must focus on the valuation. You cannot sell your business at any desired value without getting a preliminary valuation.
This is like selling a house. If you plan to sell your house, you research local property sales to know the prices for which similar houses are being sold. Then, you will examine the house for issues and correct them to attract customers. Selling a business is similar, but with more money at stake.
A proper valuation informs you of the difference between the company’s initial and target values. Then, you can fill the value gaps by working on those issues and selling when the company reaches the target value. Hence, you can close the gaps and reach your goals by creating value through your customers, employees, and mindful use of your time and resources.
When planning your exit, always start with a valuation to know how much your company must grow to reach your desired value. Identifying and working on the value gaps is what you must focus on to arrive at your intended destination. Value Scout offers services to plan your successful exit by helping you create value.
Still not sure where to begin? Connect with Value Scout.