As a business growth advisor, I am frequently asked this question by business owners: “How do I make my company more valuable?” Ultimately, what they are after is to understand: “What is my company worth?” For a privately held company the answer is, of course, “That all depends what someone else is willing to pay for it.”
Here’s an analogy:
Download our infographic on “Building Value” in your company.
If today someone is asking $100 for a rare baseball card, and you know for certain that you will be able to sell this same card in 10 years for $1,100, the annual earnings are $100 per year or 10%. This is a fairly good and conservative investment. But what if you lacked any certainty about what its value would be in 10 years? Would you still pay $100?
Investors love predictability. They look for consistent and transparent financial performance as an indicator of future outcomes. So, strong financial performance over time, coupled with reduced risk, increases value dramatically.
The greater the predictability around a business’s performance, the more willing a buyer or investor is to purchase based on expectations of future earnings.
Predictability of future performance is one important factor in valuing a company, along with:
· Profitability and sales growth
· Level of liabilities
· Net assets, including cash reserves
Optimizing value
Here are ten factors that would make it easier to have a “best-priced” exit/equity event for a privately held business. Each of these items decreases risk for the investor or buyer, and thus increases value.
Audited financials to increase confidence that numbers presented are accurate.
A “quality of earnings report” that gives a detailed analysis of the historical revenue and cost structure of the business.
A clear legal entity structure, including well-documented relationships.
Alignment among leadership, partners, board members and owners.
Good risk management, including controlled costs and absence of claims/suits against the organization.
Strong intellectual property and brand protection (patents, trademarks, copyrights, trade secrets, etc.)
No “time bombs” or hidden liabilities (secret deals, untracked inventory, unhappy clients or suppliers, etc.)
Few or no personal guarantees for the business, working capital issues, etc.
Use of performance dashboards and other metrics.
A written liquidity plan with established accountability.
Of course, there are many other important things to consider when an investor values a company. Some of them are perhaps harder for a financially minded professional to measure, as they are “softer” in nature. But they are equally important. Here are some examples:
A strong, experienced management team
Sound vision and logical organizational structure
The ability to attract and retain top talent by being an "employer of choice"
Strong references from customers, accountants, consultants, etc.
Industry involvement and recognition
In all, I believe that the quality of a company’s financial performance comes down to the level of confidence one has in the predictability of the future outcome: the predictability ratio of sales and profitability at today’s value. This means value can be reduced by anything that:
Takes away from transparency into a business
Lowers the likelihood of the current forecast; or
Increases the risk of a negative surprise
So, as a rule of thumb, focus on reducing risk and increasing quality forecasting as guides for improving value.
If you would like to share your thoughts on clever ways to boost value or you have questions about your business, please connect.