This article was updated in July 2019.
As valuation specialists, we’re consistently asked: “What is the value of my company?”
Whether you’re preparing for a transaction or looking to transfer wealth, finding the answer often starts with several steps including:
- Analyzing cash flows
- Evaluating guideline public company and transaction multiples
- Exploring the use of other options-pricing models and methods
These factors can help provide a good sense of your organization’s value—but until you understand what’s driving those outputs, you won’t fully grasp which inputs can be adjusted to help push value higher.
An overview follows of areas to focus on to help build value in your business.
If a company decreases expenses and increases revenue, its value grows. Valuations, however, aren’t quite that simple. Highlighting your so-called growth aspect is a powerful component in determining your company’s value. Mathematically, a company’s value increases the higher the growth percentage, but knowing how to accomplish this financial movement is difficult.
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. Understanding the need to build value and instituting change to do so are two different things.
Support a Dedicated Workforce
A component of many companies’ intellectual property and know-how leaves at the end of the day when the workforce clocks out. That knowledge drives a company’s growth, and there would obviously be a negative impact on the business if the workforce didn’t return in the morning. Several steps can be taken towards making your employees feel valued and happy to show up to work every day.
Different industries have various takes on what it means to have a dedicated and loyal workforce, but one overarching theme is nurturing a workforce to feel it belongs. When employees feel like they’re a part of something important, productivity will likely increase.
This can be accomplished by establishing your company in the marketplace by offering superior goods or services compared to competitors and providing a strong work-life balance for employees.
Relationships with customers, suppliers, or distributors are all important assets. Maintaining and nourishing long-lasting relationships can help make clients continue to work with you rather than going elsewhere for their business needs or seeking out your competition.
In the beginning 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, processes, and results that make it possible for these relationships to flourish. That effort will usually pay off when you most need it.
Demonstrate a Marketplace Presence
A strong marketplace presence doesn’t necessarily mean that a company has hundreds or even tens of thousands of customers. For example, some companies 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. It’s important to ask yourself how well-known your business is in the marketplace as a commodity and if its 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 you’re 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.
A public company’s value could decrease if investors believe there’s no transition plan in place. Additionally, as a company grows, you may need a management team to operate various company functions because 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
Even when companies feel strongly that they have a strategy that will lead to a certain percentage of growth, the marketplace often presents unpredictable factors that could alter any plan.
If a company isn’t able to assess and understand the marketplace, including its customers or trends, then it won’t know how to adjust its plans accordingly. It’s important to ask if your business can evolve with the marketplace as trends change and if it can deliver products or services to meet those evolving needs. If not, 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 different companies.
For example, it’s important to determine when it’s more efficient to outsource to perform various functions as opposed to hiring internally. There also may be certain areas that you could focus on to reduce expenses or increase revenues.
As your company grows, you may need to consider hiring a sales and marketing team or opening another office in a location where you could leverage a potential educated workforce or lower costs of living. Ultimately, it helps to be top at what you do and let others take care of the rest.
Reinvest in the Company
Companies that reinvest in the business typically stay the course for much longer.
This might involve 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.
We're Here to Help
Business valuation is part art, part science. Understanding and implementing these should be part of a larger growth plan.
To learn more about how you can make smart, informed decisions to help your business grow, contact your Moss Adams professional.