Know Your Business Value to Grow Your Business Value

by Dave Driscoll

Growing business value should be the ultimate goal of every business owner. Actively engaging in ongoing, focused efforts to grow value is the only true way to ensure the well-being of the company, the customers, the employees and the owner’s Life Beyond Business.

So, how do you know whether your plan to grow business value is going to be effective?

First, you need to know the actual current market value of your business. You have to know where you are to know where you are going. To be brutally honest, every business owner I’ve ever talked with believes that his/her business is worth quite a bit more than it really is. The owner is personally and emotionally invested in every aspect of the business’s history, culture and relationships. Believing in that value is natural and motivating. But the market judges business value much more on solid facts and figures … cash flow, seller’s discretionary earnings (SDE), management team strength, customer diversification, etc.

To truly know the current value of your business, you need an unbiased, comprehensive valuation. Be aware that not all valuations are created equal. Applying a simple multiple to your cash flow or EBITDA does not calculate a reliable value.

A thorough market valuation should be based on three to five years of tax returns, profit-and-loss statements, balance sheets, and normalized SDE — plus an assessment of your value drivers, leadership team, policies/procedures, customer base and market position. This process is not quick or cheap. However, it is affordable and worth the investment. An experienced professional should process your financials, interview the owner(s) and analyze market data to generate a realistic, comprehensive picture of your company’s value within a month. Aside from collecting the needed documentation, your time commitment in the process will be minimal — after all, you have a business to run!

Often owners wait until they are considering selling their business to find out the market value. Unfortunately, increasing business value significantly at that point is nearly impossible — the cake is already baked. Use the insight you learn from your business valuation now to make educated decisions long before you plan to sell your business.

Second, create a written plan to build business value. Business owners spend so much time putting out fires that the time for strategic planning is limited. Too often, improvements are random, unconnected efforts or the result of the latest crisis. This is not the place for a shotgun approach; you need a logical, well-founded strategy for long-term incremental changes. If you are honest with yourself, you probably do know what needs to be done to increase business value.

Candidly tap into your instincts and expertise in your field:
1. Critique and refresh any process/policy that is defended “because we’ve always done it that way!”
2. Are employees empowered to improve their performance, do they spend too much time seeking approval, or are they too afraid or apathetic to make suggestions?
3. What tasks and roles can you delegate to others?
4. Are your policies and procedures accurately documented to reflect what really happens every day?
5. What will your customers need in the future that is different from today?
6. What do your competitors do better than your company?

Gather input from your management team and top employees as well; do not discount the value of their insight for all the things the boss does not see.
I know how hard it is to prioritize planning when you are faced with never-ending demands for your time. However, knowing your business value and implementing a focused plan will pay you back many times over through increased business value.

Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.