Starting with the end in mind is the best practice when founding a business. As you go about day-to-day planning and the overall building of your business, consider its value proposition, an estimation of the health and well-being of your business, and the factors directly or indirectly impacting your business value.
Elements of Business Value
Business value refers to more than just economic value or shareholder value. It also includes customer value, employee value, owner/partner value, supplier value, managerial value, and societal value.
Shareholder value is the total value of the company’s shares or the business value after deducting debts. Dividends enhance shareholder value, and stock options reduce it.
Customer value is the value those who purchase your products and services receive. It includes elements like utility, satisfaction, benefits, quality, etc. Depending on your business model, your customers could be individuals or other organizations.
Employee value. Employee skills and experience are significant assets for the business. Companies create employee value by adopting employee-friendly policies and providing training and equal opportunities.
Owner/partner value constitutes healthy partner relationships and sustainability/growth of their interests in the business.
Many forms of value defy quantification in monetary terms. For example, you cannot attribute certain intangible assets like a business model or intellectual capital to the stakeholders; however, they form a significant part of the total business value.
The calculation of current market value (CMV) includes analysis of both tangible (financial) and intangible (operations) assets. Business value is the total sum of all the tangible and intangible elements in the company. Tangible elements include monetary assets, stockholder equity, fixtures, utility, etc. Intangible elements include brand, recognition, goodwill, trademarks, etc.
How to Create Value
Value creation happens as the company builds products and services and profits from selling them to satisfied customers. This can be measured through profitability, sustainability, growth, customer satisfaction, market positioning, and much more.
The business value may be subjective, depending on the need. For instance, the value a shareholder wants to see could be purely financial compared to an entrepreneur aspiring to fulfill personal goals and development.
Business owners need to prepare themselves and their companies for their inevitable exit. They must understand their business value from both the buyer’s and investor’s perspectives and create value to achieve their desired exit.
3 Steps to Achieve Value Creation
1. Get a Professional Business Valuation
Getting a business valuation is the first step in your value-creation journey. Even if your exit date is far off, knowing your business value makes your business plan more effective.
A business valuation helps you to:
Know your baseline value. A business valuation determines your company’s CMV. The CMV serves as a baseline value. You need to know this starting point to direct your company to your desired goals.
Using a professional business valuation relies on facts and analysis rather than gut estimates when creating growth strategies. Working from accurate information dramatically increases your chances of success because it enables you to set measurable goals and track your company’s performance with periodic business valuations.
Understand your growth potential. A business valuation reveals your company’s strengths and weaknesses. While you may be very ambitious, a business valuation report helps you set feasible goals, preventing you from wasting time and effort chasing unrealistic goals.
When you set realistic goals, you stay motivated while achieving them. You work on building your business strengths and eliminating weaknesses. Small victories, followed by periodic replanning, allow you to reach your ultimate growth goals.
2. Protect Your Assets
As life is unpredictable. You need to protect your valued assets. By understanding the value of your business assets, you can buy appropriate insurance for tangible assets and safeguard intellectual assets with proper copyrights, patents, etc.
Take precautions to protect your business from legal challenges, tax issues, and other problems due to unforeseen events like divorce, accident, or death.
Protect your business interests. Knowing your business value helps you create a buy-sell agreement that protects your interests as a partner. A buy-sell agreement legally stipulates how a partner’s share will be reassigned and other terms in the event of their exit (accident, death, divorce). It facilitates a smooth ownership transition and helps keep the company in the hands of the current owners.
Attract funding. To raise funds or secure loans, you need to show a professional business valuation report confirming the correct value of your company. A certified business valuation report showing the stability of your business saves you from producing more security or accepting high-interest rates.
Plan for your estate or trust. Your business value impacts the kind of tax plan you will require for your estate. You need to check if your assets and business value exceed the federal tax exemption limit. Get a business valuation to enhance tax planning and ensure that your heirs get the maximum possible proceeds after the tax deduction.
Plan your retirement. Your sudden exit may leave you and your company in a financial mess. Plan for your exit years in advance of it happening. Consider your goals regarding personal finances, legacy, lifestyle, and other unforeseen expenses in your retirement years. Knowing your business value today helps create an effective exit plan and achieve your goals.
Close your business value gaps. Your business goals almost always exceed your company’s current value. A business valuation helps you identify the difference between the CMV and the desired value of your business. Work with expert value creation advisors to identify factors driving or destroying value in your unique business. Focus on enhancing your value drivers and eliminating your value destroyers. Plan measurable value-creation initiatives that align with your company goals and execute them.
3. Be Consistent in Your Value Creation Efforts
On-time planning and execution of value-creation initiatives are not enough. You must check the success of your value creation initiatives with periodic business valuations to ensure they’re working and that you’re on the right track. Upgrade your strategy to align with your goals by replanning the value-creation initiatives as necessary. Continue this cycle until you reach your business/exit goals.
When Should I Start Value Creation?
Now! A business either creates or destroys value throughout its lifecycle. Building your business is about building value for your customers, suppliers, society, employees, and yourself. If your products, services, operations, and competition do not provide value to the stakeholders, your company is on the path of failure.
A well-run company creates value; however, that value creation may not be sufficient to sustain its sustainability and grow it. A business valuation identifies what’s working and what’s not and what can be improved to intentionally sustain and grow your business.
Do not leave value creation to chance. Build value for your business with timely decisions backed by accurate information and analysis. Knowing your business value today helps you effectively reach your future goals. Contact Quantive today to learn more.