While business owners often get a business valuation done for various reasons, they remain unsure what to do after the valuation. Whatever the reason for getting a business valuation, you can always make the most out of it by knowing what to do afterward.
What Does a Business Valuation Determine?
A business valuation is a complex and scientific process analyzing the assets and performance of a company to determine its economic value. It considers several factors, such as company- and industry-specific risks, operational issues, structural problems, the management team, the strengths and weaknesses of the business, market conditions, industry trends, competition, customers, cash flow, financial situation, and more.
A business valuation imparts deep insights into the strengths and weaknesses of your company. It enhances your knowledge of the business’ assets and how they add or reduce your company’s value. It highlights areas ripe for structural change, so you can get rid of things not working in your favor and bring in what is required.
The company value determined by a professional business valuation serves as an accurate foundation for building your business plan and setting realistic goals.
Often companies set overly ambitious goals, only to realize later that they are not attainable. A business valuation serves as a reality check and helps you set feasible—if still ambitious—goals. You will see your efforts deliver results at each stage, which motivates you and your people to continue the good work.
The business valuation report informs you of your company’s current market value, meaning you know what your business is worth if sold today. It helps you with funding, litigation, divorce proceedings, the entry/exit of a partner, insurance, estate planning, and taxation matters. Use this information to enhance profitability and reduce liabilities.
What Is Value Creation?
Every business starts with value creation. Delivering value to generate profit is the purpose behind starting a business. The work or the trade that the company carries out creates value. Bear in mind that not all work creates value, and not all value is created equal.
Value creation consists of the steps related to creating value. You can do it in various ways. A business needs to create value for its customers, investors, and employees simultaneously, as they are linked.
To create sustainable value, you, as a business owner, should focus on all three groups together. You may begin by creating value for your customers, which you will not achieve until you have the right people in your organization and your investors get positive returns.
To create value for customers, provide consistently satisfying products and services, understand their unique needs, and invest in process innovation.
To satisfy your customers with precision and ever-increasing speed, tap into the energy and commitment of your employees. Motivate them by using respectful treatment, professional training and development, better compensation opportunities, meaningful work, and involvement in decision-making.
Create value for investors by providing consistently high returns for their investment. Your company must have attractive profit margins and strong revenue growth to satisfy investors, and to achieve the desired profit margins and revenue growth, you, in turn, need satisfied customers.
Connecting Business Valuation and Value Creation
A business valuation determines your company’s current market value, enabling you to identify your business’s value gap. The value gap is the difference between the company’s current market value and the required value to achieve your desired exit or future goals.
A business valuation helps you identify the areas of your business responsible for the value gap. Start your value creation strategy based on understanding where your company needs improvement. Eliminate risks and correct weaknesses while enhancing your business’ strengths.
5 Top Ways to Increase Value
1. Create Value for Owners, Investors, Employees, and Customers
Look at business value from different perspectives to recognize forms of value that lead to economic value. Some may be more difficult to measure than others, but they are essential for the long-term success of your business. For example, consider the value that optimized processes and the latest technologies provide your business by saving time and money.
As discussed earlier, you can create value through work. Employees completing the work grow in experience, confidence, and competence. Team spirit and partnerships strengthen, and intellectual property comes into existence. Your business earns a satisfied, repeat customer base and the confidence of owners and investors in your company’s future.
Identify which areas, if streamlined, may create more value for your unique business. For example, a manufacturing unit might build value by reducing the delivery time of products to its customers and a trading entity by decreasing its order processing and shipping time.
2. Align Company Goals and Objectives with Value Creation
Create goals and objectives that align with your business value and decide how you will measure your progress throughout the value creation journey.
Ask yourself questions like:
- What does the company do?
- Who are the customers it serves?
- What is the need the company fulfills?
- How does it do that?
- How can the company serve its target customers and still make a profit?
3. Create Value for Your Suppliers
Build a relationship of trust and transparency with your suppliers. Track how suppliers value the business you give them.
4. Focus on Your Strengths, Eliminate Your Weaknesses
Every business has strengths and weaknesses. Your value creation strategy should focus on making the most of your business strengths even as it enhances them. Identify the value drivers for your company, including strong systems and processes, a competent management team, a large and diversified customer base, and a strategic plan to achieve your goals.
Weaknesses are value destroyers, the skeletons in your closet that must go. Mitigate your business risk and plan how to turn negatives into positives. The most common value destroyers include heavy dependence on the business owner, customer concentration, a lack of documented processes and policies, fluctuating income, a lack of business scalability, an inefficient business model, etc.
5. Create and Enhance the Culture for Value Creation in Your Business
Develop a culture that supports your value creation goals and objectives. Without it, you put your business’s future at risk. If your current structure does not align to value creation, make the necessary changes. This may include reorganizing a hierarchical organization structure to one more lateral, empowering employees to make decisions, focusing on customer service or product quality, removing toxic managers and promoting from within, etc.
Achieve Your Goals
Following business valuation with value creation is a foolproof recipe to achieve your company’s long-term goals. It puts you on the path of a high-achieving venture which will inevitably support your desired exit. However, the complex process is best managed by advisors who bring industry expertise and proven results.
Value Scout can connect you with the best advisors. Get in touch to know more.