Are you looking to increase your revenue and business profits this year?
Are you looking to sell your business during the next three years?
Often, when we work with CEOs, they have an unrealistic perception of how successful they are and what their business is worth from a buyer’s acquisition point of view. They may pay themselves well, take generous benefits and vacations out of the company and have no boss — so from their ownership perspective, business is good. Their thought process is centered on their sweat equity and emotional connection to the business they built and live every day. This misperception of value sometimes hinders their business growth capacity because they have an inflated financial picture of their true net worth. Subsequently, they implement our Value Forward CEO business growth suggestions too slowly.
One key business tool CEOs can use to grow their company through a staged process that we recommend is getting an annual business valuation. Having an annual valuation performed on your business helps management teams strategic identify success gaps in their marketing, strategy and sales programs. When done correctly, valuations pinpoint business cash flow issues, strategy needs and produce an independent third party view of your business value from a potential buyer’s point of view that is not financially or emotionally attached to seller’s needs.
There are many methodologies used to calculate a company’s business valuation, including:
- Book Value: The book value of a business is based on the accounting records and is determined simply by subtracting the company’s liabilities from its assets.
- Discounted Cash Flow: This valuation method uses the projected future unencumbered cash flow of the company (meeting all the liabilities) discounted by the firm’s weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity), plus a risk factor beta that is calculated and measured.
- Market Value (Public Companies): The market value is calculated by multiplying the quoted share price of the company by the number of issued shares.
- Asset Accumulation: The asset approach is based on the value of the business if you liquidated or sold off the property, plant and equipment (PP&E) assets of the company and paid off all of the company’s liabilities. The net proceeds would accrue to the equity of the company.
- Multiple Valuation Methods (Sales, EBITA . . .): Business value is calculated based on a multiplier of the company’s annual sales and/or its earnings and compared to other like business sales within its industry (and sometimes its geography) to get a buyer comparable. This model often looks at intellectual property valuation based on a roll-up added value as well.
- Price Earnings Multiple Valuation: The price-earnings ratio (P/E) is simply the price of a company’s share of common stock in the public market place divided by its earnings per share.
Of the 6 methods mentioned, method number two — Discounted Cash Flow — is the best CEO tool to help you understand your current success level by analyzing the true available cash your business throws off so a qualified buyer can calculate your business’s true worth and their return on investment if they buy you. Even if you have no short term exit strategy planned, knowing what your business is worth can help drive your business decisions better. If the valuation is low as compared to what you think it should be — it helps you truly identify the growth goals you need to focus on. Use business valuations as a strategic business driver to make better decisions.
To measure your business success — get a business valuation every year.