As business owners look ahead to the future, many of them are planning on how to transition out of their company. Given that a business owner’s greatest asset is generally his or her company, it’s important to understand the business’s real worth well before it’s time to exit. A proactive business valuation performed well before an ownership change can provide an owner with a roadmap for improving the bottom line, driving profit and increasing overall value over time. Ultimately, this means a more favorable payoff when the time comes to execute a succession plan. “To maximize business value, owners need to develop a strategy to build institutional value,” says Barry Worth, member and director of mergers and acquisitions, Brown Smith Wallace LLC, St. Louis. But aside from simply determining the company’s worth, an owner should dig deeper and work to understand the various components of a business valuation. What areas of the business are driving value and what parts are profitable? And just as important, what departments or product lines or people are not contributing to the bottom line? “A proactive business valuation is about looking at the value of the company, then reaching below and peeling off the layers to identify what components of the business are really driving value,” said Bill Willbrand, tax and accounting member, Brown Smith Wallace. Smart Business spoke with Worth and Willbrand about how a business valuation can serve as a strategic growth tool for your business. Why should a business undergo a business valuation years before an ownership change? By performing a business valuation well before initiating any sort of exit strategy, you can create a baseline, a planning document to use as a roadmap for building value. A valuation can help you focus on key components of the business, understand what areas of the business are really driving value and identify weak spots that are detrimental to the worth of a company. For example, a valuation may show that a certain product line is not actually contributing to the financial success of the company. This might be a surprise to owners, who never fully investigated the product line’s contribution from a value proposition perspective. Based on these findings, the company can set goals to eliminate or sell off the product line and focus its energies on areas of the business that have the greatest impact on profitability and long-term value. A business valuation forces you to really tease out value drivers and spoilers, and it gives you a baseline so you can develop a plan and begin to measure progress. How can a business valuation enhance shareholder value? Through a business valuation, a company can determine its true value drivers. Those might include key client relationships, location, proprietary technology or any number of critical success factors. A valuation illustrates where a company should focus its efforts in order to grow the value of the business and maximize dollars invested in growth. Simply put, investors want to know where to focus time, talent and capital, and a business valuation can highlight those promising areas. You wouldn’t throw money at a product that wasn’t a value-driver. Also, keep in mind, shareholders are the true owners of a business, so a valuation is a critical exercise for identifying corporate differentiators that deliver shareholder value. How can a business owner use a valuation to increase a company’s worth? A valuation can help you begin with the end in mind and create a plan to focus on enhancing areas of the business that promise profit. Once you identify areas of the business that improve profit, you can stop doing the things that don’t. For example, you could eliminate a product line in order to focus your company’s talent and capital on a product that will raise the overall value of the business. A valuation truly serves as a critical planning document that can help you make key business decisions in the areas of customers, people, process and finance. When these four components fall into place, a company has a balanced scorecard and is in the best position to improve its value. What are the keys to developing a value enhancement process? The valuation establishes a baseline and a better understanding of the key value drivers. These are different in every company, but there are three basic areas that affect the value of every company: people, systems and strategy. Management depth and quality affect a company’s value. A company can immediately improve the bottom line, and its overall value, by establishing sound contracts with key personnel. Second, financial and accounting systems are important to assess the value of a company. Third, a company that has vision and a plan to reach its goals is more valuable than one without such a focus. Simply performing a business valuation improves value because it gives owners a clear picture of where the company stands and what components will help it grow profitably. How does an owner get started with a valuation process? Seek out accredited individuals specializing in business valuation who know how to really dissect a business, analyze financial statements and project to the future. While maintaining their independence and objectivity, valuation professionals can apply their business knowledge and recommend steps you can take to improve the overall value of your business. BARRY WORTH is a member and director of mergers and acquisitions and turnaround consulting and BILL WILLBRAND is a member in tax and accounting at Brown Smith Wallace LLC. Reach Worth at (314) 983-1202 or firstname.lastname@example.org. Reach Willbrand at (636) 754-0200 or email@example.com.
How business valuation can serve as a strategic tool for growth Featured
Kristen Hampshire 7:00pm EDT December 26, 2010