In our previous post, we introduced you to the eight key drivers for assessing the value of your business.
When considering a sale, assessing the value of your business is common practice, but what if you aren’t currently interested in selling now or in the foreseeable future? Why should you care about building value in your company?
Understanding the value of your business allows you to not only build an asset for your future, but also allows for continued growth and sustainability.
To review, value can be assessed using the Value Builder System™ and the outlined eight drivers.
- Financial Performance
- Understand your top and bottom line
- Growth Potential
- Know your revenue potential and have confidence in your future income stream
- How dependent are you on specific customers, employees, vendors?
- Working Capital
- Determine your working capital efficiency and cash flow needs
- The Hierarchy of Recurring Revenue
- Analyze your repeat sales potential
- The Monopoly of Control
- Understand your proprietary products, pricing strength and differentiation
- Customer Satisfaction
- How loyal are your customers and their referral potential?
- Management Depth
- How dependent is your business on you?
What does that mean, exactly?
How your business rates in each of these eight categories is taken into consideration during a potential acquisition. But reviewing how your company ranks in each category can also help you identify strengths and weaknesses within your company and your processes.
For example, consider your company’s management structure and depth (Value Builder Driver #8): Can the business function without you day-to-day?
Not only is a business that is not dependent on its owner a more valuable company from an acquisition standpoint, it’s a more valuable asset in general. It allows for faster expansion scalability, and a greater ability to adapt to changing markets and/or internal situations that may arise. It also allows you to focus on the big picture and more strategic ideas for the business—something many business owners strive for, but rarely achieve due to being caught up in the business minutiae.
The biggest factor in the success of creating management depth in your organization is creating accountability for that next level of leadership. By holding your managers accountable and rewarding them with bonus/compensation plans, the burden of making the company successful is shared with you and your management team.
A business that has the depth of management in place, or processes, procedures and technology that allow the business to run smoothly with or without you, gives you the opportunity to enjoy life, or perhaps even retirement, outside your business.
You might be a family-run business with a clearly designed succession plan in place, or you might be a young company with big plans to achieve. Either way, building value is important for all businesses, and it should be your most important business goal even if you‘re not considering selling.
Building a valuable business takes time, and circumstances change quickly. Creating a valuable business allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value and you could choose to sell one day.
SVA will host a seminar on this topic in Madison at the UW-Madison’s Fluno Center on Wednesday, May 31st and on Thursday, June 1st at the Embassy Suites in Brookfield.
For more information on these events, please visit www.sva.com/execseries.