The primary aim of any business owner is to generate profit, but reaping the benefits of a business depends on value creation. Value creation refers to how a company increases its market value to meet the owner’s end objective (i.e., a successful business exit). The value created throughout the company’s life has to be planned well and executed for all involved: business owners, investors, employees, suppliers, and customers. In turn, those people make the business valuable.
The value creation process requires an experienced and qualified advisor who can give you a blueprint of the growth strategies needed to increase the business’s value. The company’s owner, its management team, and the advisory team collaborate to identify strategic growth initiatives and business goals to increase the company’s value. These strategic plans and goals provide the direction for value creation.
Insightful planning and execution make value creation successful. Currently, value creation defines the financial value of the business and acts as a management tool that helps the business function better. To do that, the collaborative team must track what brings value to your business and how.
Value Creation Impediments
The value creation process is not a cakewalk; it needs thorough planning. A company’s current market value is often lower than its intrinsic value. The value creation process considers tangible and non-tangible factors, financial statements, and market analysis.
Some business owners plan for their eventual exit right from the beginning, which helps them build business value in a structured manner until they are ready to leave their companies. The initial value creation stage is often challenging, leading business owners to take advice from trusted, experienced advisors before executing their value creation strategies.
An exit plan addresses the business and personal goals of the owner, what they will do with the business in the future, and what their retirement needs are. It anticipates the amount of money the owner would receive at the exit. Moreover, an exit plan bridges the gap between the company’s strengths and weaknesses and guides action to strengthen the company’s critical aspects.
To create profitable market value, let’s discuss what obstacles you may face during this journey.
You Don’t Know Your Current Value
Current market value refers to the value of a company or the worth of its assets in the market. Once the business owner is aware of its market value, they can identify the value gap between that and what they want it to be before selling the company. Identifying the value gap is essential, as it corrects any assumption the business owner has about the value of their company.
Reasons to Know the Current Market Value
The current value of the business gives you verifiable information about the business. By getting the business valued, an owner knows its fair market value and can identify the value gap to be overcome to exit the business successfully. Other reasons to know the current market value of your business include:
- Improved understanding of the company’s assets: Knowing the current market value of the company’s assets helps the owner(s) set insurance values, reinvest the proper amounts in the business, or set prices to sell certain assets at a profit. Such decisions need a strong foundation like valuation to determine accurate numbers.
- A higher resale value for the business: You need to have the current market value to sell your business. If you know its current value, then you can work to increase that market value. Knowing the valuation of the business enables the owner to ask for a higher price than the selling price because you have the data to justify that premium. Value creation plans showing marked progress strengthen a business, stand firm and leverage a higher price.
- Fair company value: You might have a rough idea about your company’s value based on your accounting books, cash in hand, bank balance, and assets value; however, the true company value is greater than those parts. Professional advisors can determine your company’s true value.
Current value helps you buy or sell business assets to increase profit. Based on five years of valuation data, it even attracts potential buyers for better deals.
If a potential buyer is interested in buying your business, you should be able to show them profit trends, how the company has grown, and future growth plans as well. Such true value gives a crystal clear idea to the buyer about your company and how it works.
Knowing your company’s value, you can even negotiate a better price than a buyer offers. This helps you identify potential buyers and get better options when merging with another company.
If you need more investment capital in the business, valuation plays a considerable role. You need to show them your full valuation report to convince them to invest a certain amount. This helps your company avoid financial disaster. Valuation projection also helps to gain better funding and attract potential investors.
Valuation is time-consuming and challenging, but Quantive’s valuation services change the game.
You Don’t Have a Plan
Business owners set goals and plan strategies with the management team to achieve their business goals. Value creation must be planned systematically to achieve the owner’s business goals. Having a plan for value creation helps you track the value created.
Before initiating the value creation plan, look at proven strategies to make your plan effective. By keeping this in mind, owners can create the most effective plans for value creation.
- Have effective plans rather than more plans: More is not always better. With your advisor, make a list of high-impact plans that deliver results faster. Rank your projects according to value and speed.
- Choose the right people to execute the plans: Project completion is expedited by the right person who knows how to delegate responsibility and ensure employee productivity. There should be a crystal-clear distribution of authority and responsibility.
- Achieve your time-bound goals: A leader’s focus on quality delivery creates a chain to accomplish tasks on time and without error. This creates a smooth, successful path for value creation.
Why Do You Need a Plan?
- To sort priorities and decide on direction: You need to have a strategy to prioritize company projects. Strategy directs the management team’s distribution of work based on priorities. This helps employees identify which tasks to accomplish first.
- To get your people on the same page: Different departments focus on different goals, but one needs a strategy to get them to work toward the same goal. Setting your strategy aligns the various department in the same decided direction.
- If your leaders cannot say no to new ideas or new potential tasks, you need to have a strategy to simplify decision-making. The strategy prioritizes work and prevents taking up not-so-urgent tasks.
- For better alignment: To ensure all people in the company, regardless of position, create value, you need to have a strategy to align their work. People in executive positions may understand their duties and value creation well, but what about the rest? A value creation plan explains each person’s contribution.
- For better communication: Sometimes, leaders form decisions and goals for the company’s growth but fail to communicate them to the rest of the employees. Uninformed people work toward different purposes, which creates a gap between company goals and project efforts. A value creation plan explains what is needed from each person.
You Don’t Understand the Value Being Created
Once you have started your value creation journey, it is essential to measure the impact of all the growth initiatives being implemented in the business. Most owners focus on quarterly or annual goals but ignore or delay value creation due to a lack of planning.
When your people start creating value for real, it facilitates your successful exit strategy with value creation. Quantive can help you identify the value gaps and turn them into potential value-creation resources. Contact the Quantive team today to get started.