There are several reasons to value your business. For instance, a business valuation could inform sale price negotiations, ESOP planning or exit planning. Yet, one overlooked reason for having your business valued is value enhancements. Throughout the life of your business, a valuation can act as an accelerator for enhancing the value of the business by enabling owners to make more informed decisions based on identifying strengths and weaknesses in the business.
In most cases, a business valuation results in a singular numerical figure. However, a business valuation can also result in a range of values that highlight certain areas like revenue, expenses, profit margins, and cash flow. Through a more forensic understanding of your business, a valuation expert can identify ways to improve revenues and decrease expenses. In addition, a valuation can identify strengths and weaknesses in the business that can inform action plans for how the company should move forward.
When performing a valuation, a common weakness within a company’s operating expenses is workforce productivity or effectiveness of sales and marketing. For instance, my firm was working with a window installation company that had doubled its workforce over the course of four years. As revenues climbed so did the cost of the workforce. During their second year, the company was hiring individuals that did not have experience in the field, resulting in an increase in training costs and loss in productivity. In addition, the incoming workforce was unable to assist in more profitable engagements due to the level of precision required. As such, the company began bidding on lower profitable engagements within the residential space in order to adequately train inexperienced individuals.
By the time, we were engaged, the owners of the Company had realized an annualized growth rate of 20%; however, the Company’s five-year trend for net profit margin was declining. As a result of our engagement, the Company renewed its focus on higher profit-margin engagements. Management assisted with relocating a majority of the workforce that had joined in the past four years.
This enhanced value exercise took place over two years ago. Management recently sold the Company to one of their managers of ten-plus years. Had management sold the business two years ago, they would have left around a million dollars on the table.
A weakness could be identified as an area of the business that is not performing at its optimal potential. A weakness could also result in an area of the business that is losing value. The example above touched on an inexperienced workforce and the acceptance of low-margin engagements.
Although we may focus on the area of improvements, the valuation process will also identify strengths. These strengths should be emphasized and enhanced moving forward to assist with the growth of the company. These strengths are often times referred to as value drivers. Value drivers have a significant impact on the performance of your business. Value drivers come in many forms, such as human capital, cash flow management, customer diversity, supply chain management, technology, etc. A business valuation can assist companies in monitoring these value drivers.
Understanding the value of your business is important, regardless of any near future transactions. Even if you have not thought about selling your business or purchasing a business, it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with. We can also help identify ways to increase the value of your business.