Why You Need To Know The Value Of Your Business
While no two businesses are exactly alike, one of the most common traits that all business owners possess is passion. Not only has this passion allowed you to be able to provide for yourself and your family, in many cases it has allowed you to distill a sense of purpose in your life and positively impact your employees, community and beyond.
How much is your business worth? Well, for the majority of business owners, this number is a lot harder to calculate than you might think. However, once you do know this magic number, you have the key needed to do some really, really great things.
Knowing your business’ true value, enables you to make the educated decisions needed to protect, maintain and grow the value of your business. And remember, business growth not only affects you, it affects everybody who has supported you in your efforts, including your family and employees.
If you’re like most business owners, your business is your most significant asset, typically comprising 50 to 70 percent of your net worth. As a result, it’s essential to know the value of your business in order to plan for the next chapter of your life and to ensure that you leave those who depend on your business in the best possible position for their future. We’re here not only to establish the value of your business, but also to act as a partner by working with and educating you on the steps you can take to build value, ultimately helping you reach your end goal.
Listen to episode 42, “Amplify The Value Of Your Business Through Trust,” of Rea’s award-winning podcast, unsuitable on Rea Radio, featuring Jeff Lacy, area president of FocusCFO.
Know What Drives Value
Do you know what factors will drive your business’ value? A business valuation allows you to identify the key drivers and actionable steps you can take to increase the value of your company. You will also be able to determine how measurable changes in these value drivers will affect its overall value.
Value drivers vary by company, but they typically fall under one of the following headings: strategy, systems, or people. Here are a few of the most common value drivers:
- Risk. Identify your business’ key risk factors and take steps to mitigate them.
- Growth. Weigh the cost against the potential benefit to your company’s value.
- Working capital. Manage your cash flow, trimming receivables and inventory if needed.
- Profitability. Know how much an incremental increase in margin impacts your value and use that knowledge when considering large investments.
- Culture. Assess the quality of your management and attract and retain quality employees.
Positive changes to these drivers will impact your value, affect competitive performance, improve employee attitudes and increase customer satisfaction.
Find out what else impacts business value and start charting your course toward succession plan success!
Going Back To The Basics To Enhance Value
Some owners may think that the only way that they can increase their business’ worth is by taking unattainable, complex steps. Instead, enhancing the overall worth of your business can be relatively simple.
Start by building a program around the basic areas that affect value. For example, when it comes to people, the depth and quality of your management team matter. Be sure to establish good contractual ties with your key personnel for an immediate improvement to the bottom line. Also remember that strong financial systems are critical in developing value. Many businesses fail because of weak financial records and lack of controls.
You have to know where you are to determine where you are going. Once a strong foundation is set, you need to have a strategy to address short and long-term goals. A company with a clear vision and a plan to get there is worth more than one with an unforeseeable path.
Keep The Finish Line In Sight
When you know where your company stands and how you can increase its value, you are in a better position to make effective decisions when faced with changes in competitive and economic conditions. That being said, in the end, it all comes down to what you want out of life and your business.
It’s never too soon to start planning your exit strategy. Simply beginning the succession planning process makes your company more valuable, as investors and lenders want to have confidence that your business will still be there and maintain success after you exit.
Owning a business is about freedom and responsibility and while you will eventually leave your business, it’s better to do so on your terms before a life-changing event makes this decision for you. A business valuation allows you to maintain control of the process and create a better foundation for decision-making. By identifying your value drivers and developing a plan to maximize value, you can improve not only your life, but your employees and family’s quality of life and the future of the business you worked tirelessly to build. Give me a call to learn more or email Rea & Associates to get in touch with a member of our business valuation and transactions team.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)