When Should You Start Value Creation?
Successful businesses create value for their owners, customers, suppliers, and employees. A company that does not create value ceases to exist. The value keeps a business running.
The value creation journey begins with the commencement of your business. However, you can reap even greater benefits if you work intentionally to create value.
What Is Value Creation?
The primary objective of any business is value creation. Companies sell products and services by creating value for their customers. As the company grows and stock prices increase, it creates value for shareholders. Considerable business value ensures that companies have opportunities to raise funds.
Even though positive returns on investment and profitability significantly impact business value, do not ignore the contribution of intangible value drivers like brand, innovation, ideas, and people.
Value creation is not just the measure of a company’s financial performance; it is a better management goal. By putting value creation first in the right way, you know where and how to grow, deploy capital better, and develop more talent than your competitors. It helps you make your business profitable, sustainable, and scalable.
Understand the sources and drivers of value creation within your organization and throughout the industry and marketplace. You can focus talent and capital on the most profitable growth opportunities by understanding what creates value.
For instance, if your customers consider good quality and timely delivery valuable, then the processes, systems, and skills that build top-quality products and services create value for your business. Similarly, if your customers find high performance and innovation valuable, then the skills, systems, and processes that build products and services with superior functionality create value for your business.
Align your actions and capabilities with the customer value proposition as a core value creation strategy.
Intangible factors play a significant role in value creation. Although varied by industry, intangible assets include customer relations, intellectual property, brand value, innovation, management capabilities, technology, employee relations, alliances, and community relations. You must invest in enhancing intangible assets with brand building, employee training, research, and development, which provide indirect advantages in the overall business value creation process.
By intentionally focusing on value creation, you adopt a long-term perspective and align your time, effort, and resources with future goals. You must develop growth plans with well-defined goals to enhance your company’s value.
However, you cannot develop effective plans if you do not know where to start. Current business value serves as a baseline to begin your value creation process.
How to Determine My Business Value
Gut estimates to calculate your company’s value are inaccurate and misleading. Incomplete data, overconfidence, or indifference leads to biased or uninformed conclusions regarding business value.
A professional business valuation lets you know your company’s current market value (CMV) and what factors drive value in your unique business. It serves as a reality check and helps reconcile a business owner’s perceived opinions on business value.
Business valuation is a worthwhile investment. When combined with marketability analysis, it helps business owners determine their company’s relative value in the marketplace and increase it. Periodic and professional business valuation throughout the company lifecycle serves to keep the business on track toward building greater value.
Reasons for Valuation
- To resolve tax or legal issues.
- When selling or acquiring a business.
- To equitably determine business assets per the terms in legal filings in the event of death, disability, disaster, or divorce.
- When gifting or donating company stock.
- When converting a C-corporation to an S-corporation.
- Creating a buy/sell, partnership, or shareholder agreement necessitates a business valuation.
- In resolving IRS or shareholder disputes.
- When attempting to raise strategic capital or obtaining a loan.
- When implementing an employee stock ownership plan (ESOP).
Business valuation is the assessment of value that entails procedures to estimate the economic value of the owner’s interest in a company. It allows the business owner to assess opportunities and opportunity costs for growth and eventual transition.
It provides the current market value, the price a buyer would be willing to pay for your business that day. It may also provide the relative value of your company in the marketplace.
Business valuation involves a thorough analysis of financial statements, tangible and intangible assets, and all factors that impact value. It exposes areas in business that destroy value, such as underperforming assets, weak financial and accounting controls, poor operating ratios compared to the peer group, etc.
A business valuation report gives an overview of the strengths and weaknesses of the company under review.
When Should You Start Value Creation?
After understanding your company’s CMV, you can determine the value gaps and begin creating value.
A business valuation reveals the factors that drive or destroy value in your unique business. You may not know what some of those factors are. A business valuation enables you to focus on enhancing your strengths and eliminating or minimizing your weaknesses. Start by defining your business values and basing your business plan on them.
Professional business valuation advisors consider the purpose and objective of the valuation. They look at the nature and background of your business, the products and services you offer, the industry lifecycle, and the economic situation. When determining the business value, they consider working capital, executive compensation, excess assets, customer relationships, and liabilities. Other factors that significantly impact business value include the competitive landscape of the industry, diversity of the customer base, dependency on the owner, market position, etc.
There are three primary approaches to valuing a business: asset, income, and market approaches. In the asset approach, advisors evaluate the business from its assets and liabilities. The income approach uses the economic principle of expectation. Advisors estimate the potential growth and future earnings to determine the value of a business. The market approach helps determine the value of a business by comparing it to similar companies recently sold or available for sale.
Business valuation advisors choose the most appropriate combination of approaches to determine your company’s value.
Create Value Intentionally
Value creation is at the core of any business activity. A company cannot survive without creating value for its owners, customers, or employees. Value creation is an ongoing process that starts with the commencement of business.
By making conscious efforts to align all business activities with value creation, business owners can reap greater benefits. The right time to start creating value is now. Get in touch to know more.
Dan Doran
Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.