As valuation specialists, we’re asked weekly: “What is the value of my company?”
Whether you’re preparing for a transaction or looking to transfer wealth, the answer starts with analyzing cash flows, evaluating guideline public company and transaction multiples, and exploring the use of other options-pricing models and methods. These factors will give you a good idea of your organization’s value—but it isn’t until you can understand what’s driving those outputs that you’ll understand which inputs you can manipulate to push that value higher.
If a company decreases expenses and increases revenue, its value grows. If it was this simple, however, many valuation and strategic analysts would be out of a job. This is why we like to highlight the growth aspect, a powerful component in determining a company’s value. Mathematically, a company’s value increases the higher the growth percentage. Knowing how to accomplish this financial movement is the difficult part.
Analysts use growth as an important indicator when selecting a guideline public company or guideline transaction multiple, and it’s also a significant component in forecasting a company’s cash flows. This is nothing earth-shattering, but understanding that you need to build value and instituting change in order to do so are two different things. We’ve outlined seven areas to jump-start the process of building value in your business.
A component of many companies’ intellectual property and know-how leaves at the end of the day when the workforce clocks out. That knowledge is what drives a company’s growth, and there could be a negative impact on the business if the workforce didn’t return in the morning. Different industries have various takes on what it means to have a dedicated and loyal workforce, but one overarching theme is that you want a workforce that feels it belongs. How can you accomplish this? Establishing a company that’s perceived to be well-known in the marketplace, offering superior goods or services compared with others, or even providing a work-life balance. These are steps that go a long way toward ensuring your employees feel happy to show up to work every day and are a part of something important, which should lead to better productivity and growth.
Whether with customers, suppliers, or distributors, relationships are an important asset. The goal is to maintain and nourish relationships so they’re long-lasting, making it difficult for those clients to go elsewhere for their business needs or seek out your competition. In the beginning economic stages of a company’s life, it may be easier to establish key one-on-one relationships, but this becomes more difficult as companies—and your resulting network—grow. Regardless, put in the extra effort to foster a culture, a process, and results that make it possible for these relationships to flourish. That effort will pay off when you most need it.
Having marketplace presence doesn’t necessarily mean that a company has hundreds or even tens of thousands of customers. We’ve spoken to companies that have limited sales and marketing teams because they receive most of their business through word of mouth. For those companies that have a premium presence in the marketplace—and can command a higher price premium compared to the competition—this may be their path to increased value. Are you known in the marketplace as a commodity, not well-known in the marketplace, or perceived as a premium product or service provider?
It’s important to have a management team in place that can run day-to-day operations in times of crises. Whether a start-up or a large enterprise, a company must have a transition plan in place should a key person—or persons—no longer be able to run the company. As we’ve seen in the past, a public company’s value could decrease if investors believe there is no transition plan in place. Additionally, as a company grows, you may need a management team to operate various company functions, since founders or early employees won’t be able to take on all tasks. Similar to having a dedicated workforce, a productive management team will hopefully translate into a productive overall workforce, which increases a company’s growth potential.
Understand the Marketplace
We hear from companies all the time that they have a strategy that will lead to a certain percentage of growth in the future. However, as the marketplace has shown time and again: If a company isn’t able to assess and understand the marketplace, including its customers or trends, then how does it know whether to adjust by 10 degrees or 180 degrees? Can you evolve with the marketplace as trends change? Can you perceive new trends in the marketplace and provide a product or service to meet that need? If not, then you run the risk of losing your position within the marketplace.
Be Financially Efficient
This area is fairly broad and can mean a number of things. For example, do you know when it’s more efficient to outsource as opposed to hiring internally to perform various functions? Are there certain areas that you could focus on to reduce expenses or increase revenues? Would you consider hiring a sales and marketing team that knows the customer participants or opening another office in a location where you could leverage the educated workforce or lower costs of living? Ultimately, be top at what you do and let others take care of the rest.
Reinvest in the Company
Companies that reinvest in the business stay the course much longer from what we’ve seen. This might mean buying new machinery and equipment that increases productivity or frees up staff to produce additional products in the same timeframe. It may also mean furthering the progress of the workforce in the form of providing training to staff, which could spur creativity.
Business valuation is part art, part science. Understanding and implementing these seven ideas on their own may not necessarily result in growth to your company, or the growth you anticipate. The process has to be part of a larger undertaking before results come to fruition. The most valuable companies have a better understanding of these key areas and more.
We're Here to Help
If you’d like to take the next step toward growth, we can help provide an insightful analysis by carefully reviewing the facts. Contact a professional in our Moss Adams Valuations Services Practice to learn more about how our independent valuations can help you make smart, informed decisions about your business.