A business valuation reveals the company’s current market value (CMV), accurate data every business owner needs even when not planning to exit. Business valuation benefits companies at every stage of their life cycle.
Knowing the accurate value of their companies helps owners better plan business and growth strategies. Business valuation also pertains to taxation purposes, divorce proceedings, estate planning, the introduction or exit of a partner, etc.
After the Valuation
A business valuation helps determine CMV and reveals the value gap in a business. Company owners often estimate business value much higher than its actual value. The value gap is the difference between the current market value and the business owner’s estimate. It may be the difference between CMV and the exit goals for owners seeking to exit.
A business valuation reveals what creates and destroys value in the company. Your value creation strategy should focus on areas in your company needing improvement by enhancing your company’s value drivers while eliminating or reducing the value destroyers (risks and challenges).
Create Value for Owners, Investors, Employees, and Customers
The value that a business should create for its owners, investors, employees, and customers is multifaceted and interdependent.
Creating value for shareholders via stock price increases ensures the availability of investment capital in the future. Value creation for investors requires generating high revenue growth and profit margins to deliver high capital returns. To achieve this, the company needs to provide sustainable value for customers.
A better customer experience increases customers’ satisfaction and loyalty. Do this by offering products and services that customers find consistently useful.
Focusing on process and product innovation helps you fulfill customer needs. Doing that increases your company’s market share and efficiency, leading to more profits. To deliver outstanding services to your customers, utilize your employees’ imagination, energy, and commitment.
Therefore, you must create value for employees to motivate them. Involve them in the decision-making process and treat them with respect. Create meaningful work for them and provide training and development and better compensation opportunities.
Creating Value for Customers
Every business needs to create value for customers. What do your customers value? When you recognize what your customers consider valuable, find out how they view your competitors’ products and services. This helps to identify what influences their buying decisions.
One way to create customer value is to set prices that convince your customers that you provide them with more benefits than your competitors. You can do this by reducing prices or adding a product or service to enhance the perceived value.
Build a trustworthy reputation to win customer appreciation for your products and services. Provide offline and online outlets that make it convenient for consumers to purchase your products and services.
Provide your dealers with the appropriate information, training, and tools so they provide better service to your customers. Information will help them better manage customers.
Ensure your customers receive your products as advertised and make an effort to teach them how to use your products.
Empower your staff to make customers feel heard and valued. This may be as simple as smiling and being more attentive to them. If staff cannot provide a prompt solution, then train them to research the issue and follow up with the customer to offer a solution.
When a customer purchases a service, the employees concerned should confirm with the customer delivery at the scheduled time.
Creating Value for Employees
To create customer value, your employees must excel. This requires creating value for your employees.
Tie employee benefits to the company’s overall value by adopting a value-driven approach. Focus on employee engagement. Fancy perks like a ping-pong table don’t create employee engagement. Employees want their work to be meaningful.
Encourage more authentic and emotional connections with employees. Allow them to speak their minds and discuss topics that matter to your employees.
Support your employees’ efforts to have a work-life balance rather than compete for their time. Check if you support initiatives to facilitate employee and community well-being. Such efforts may include fitness and health initiatives, social events, community volunteering, etc.
To carry out support initiatives, senior managers could create and support teams of employees at grassroots levels. When employees participate in support initiatives that matter to them, they connect better with the company.
Instill confidence and trust among your employees so they are empowered to think creatively and take risks. Motivate them to give their best performance. Discard outdated rules and demotivating policies. Don’t micromanage. Periodically review and update policies to keep them relevant and aligned with company values.
When offering perks to employees, focus on how they will enhance their overall well-being, demonstrate trust, and deepen connections.
Creating Value for Investors
Management’s and investors’ obsession with short-term results, failure to invest in long-term growth, and irregularities in accounting destroy business value.
Companies often compromise value by investing at interest rates lower than their capital cost to boost short-term earnings. To create business value, companies need to stop managing short-term earnings.
Managers often mistakenly focus on the short-term holding periods and try to boost near-term earnings to satisfy investors, failing to understand that, even if investors hold shares for a relatively short period, stock prices reflect the long-term view of the market.
Since value creation is a long-term process, managers are responsible for delivering long-term (approximately more than ten years) value-creation cash flows to maximize long-term value. Therefore, base your business strategy on value creation, not investor holding periods.
Acquisitions may create or destroy value fast. Companies with low debt levels may opt for mergers to improve their competitive positions.
When companies fail to improve the performance of consistently underperforming assets such as brands, real estate, business units, and other detachable assets, they should sell them and cut their losses. It helps improve shareholder value.
Another way to maximize value is to return excess cash to shareholders when there are no credible investment opportunities. Companies could motivate their managers and senior leadership to deliver long-term returns by paying effective incentives.
The base salary of senior management should include minimum stock ownership, which then converts into a specific number of performance shares. This makes senior executives bear the risk of ownership just like investors do and compels them to stay with the company and achieve performance goals. However, companies need to balance the ownership holding requirements for managers and the restrictions on their diversification and liquidity.
Finally, companies should provide value-relevant information to investors to reduce their obsession with short-term earnings and mitigate uncertainty.
Creating Value for Owners
When the value for all the above stakeholders increases, the value for business owners automatically increases. The company attains sustainable growth, ensuring high business value and a premium on its sales value. Contact Quantive today to see how our experts can help your enterprise.