You’ve Got Questions? Here’s Where You Find the Answers.
Some business owners regard a business valuation simply as a tool for selling their company. Many don’t realize that they can use business valuations to help grow and improve their companies well before they look for buyers.
It’s time to give the business valuation the credit it deserves.
Sometimes my clients decide to hold off on selling in favor of growing their company first. Unfortunately, they often adopt a “wait-and-see” tactic. They continue operating the business along its current trajectory, hoping that this approach will naturally lead to growth.
There’s nothing wrong with wanting to grow your business before putting it on the market. But problems arise when you don’t have a plan. Even worse is when you have convinced yourself that a “wait and see” method is not the same as gambling on your future.
Here’s the million dollar question: How will you develop a real strategy for growth? If you can’t answer that question quickly, perhaps you haven’t yet ordered a valuation.
The Business Valuation: Beyond a Selling Tool
My passion for valuations comes from firsthand experience. Back when I was trying to sell my own company, I received an offer that was less than desirable. But I knew that rooting out the weak spots in my company would be crucial for upping the value.
If I had started from scratch, I would have been grasping for straws. Ordering a valuation presented me with benchmarks indicating where my company needed improvements. Nineteen months later, when I returned to the negotiating table, I was able to quintuple (that’s five times) the original offer.
Don’t make the mistake of believing a valuation does little more than reveal your company’s worth.
While this is the crux of any appraisal, their usefulness goes so much further.
Here are three questions that a valuation can answer, each of which is crucial for growing your business:
1 . What are my primary sources of revenue?
It’s easy to fall into a false sense of security when everything seems to be working well. You’re making a lot of money and operations are running smoothly.
However, a high revenue stream doesn’t guarantee continued growth. Valuations sometimes reveal that one or two clients comprise the bulk of a business’s revenue. The key, in this case, is to concentrate on client diversification so your business continues to grow in a sustainable way.
2. What’s driving my profitability?
Profitability is one of the primary factors in determining a company’s value. Therefore, if you want to garner a higher price tag, increasing your business’s profitability is a good place to start.
A business valuation will give you a good idea not only of your current profitability, but also its driving force. With this information, forming a strategy to boost profitability becomes much more tangible.
Business owners are often surprised at how much small changes can increase profitability. Sometimes, a valuation will reveal that the product you’ve been selling isn’t as profitable as you thought. Shifting your focus to a secondary product or service could boost cash flow in a way you never realized.
3. Where is my company at risk?
Paired with cash flow, risk is the biggest determinant of a business’s worth. And risk goes beyond factors such as exposure to lawsuits or government actions on safety or environmental issues.
In the eyes of a buyer, risk also includes over-reliance on you (the owner), staffing weaknesses and competition in the region or markets you serve. Fixing some of these at-risk areas could result in meaningful growth for your company.
Let’s use over-reliance on the owner as an example. If you still play a pivotal role in your company’s day-to-day affairs, there’s a risk of disruption to your business once you step away.
If you started delegating more day-to-day responsibilities to your management team, the continued growth (and perceived value) of your business wouldn’t hinge on whether you were there each day to solve the issues that crop up each day.
The three questions above are just a few ways that business valuation can be used as a tool for growing your company.
The point is, if you don’t invest in a reliable and credible business valuation until you are ready, willing, and able to sell the company, you will only receive half of the benefits that a valuation can provide.
The LaManna Consulting Group can give your company an informal opinion of value that can help shape your immediate decision on whether you want to sell your company now. But a more formal business valuation can give you a clearer picture of some of the factors that potential buyers will use to evaluate the size of the offer you eventually receive.
For more insights on costly errors that sellers make before putting their business up for sale, download our FREE white paper, Code Red: Seller Mistakes.