Posted: September 01, 2012

Guest column: Why knowing what your business is worth is so important

David Fein

Most business owners are focused on generating more revenue and profit but most never think about the value of their business until they are ready to sell, and then it’s too late. What business owners don’t know is that business value is determined by much more than just revenue and profit. The Fortune 1000 figured this out long ago, but smaller businesses completely ignore this fact and that’s why 80 percent of smaller business can’t even be sold when the owner is ready to retire.

So, really, why should I care about the value of my business? Having provided business valuation solutions for more than 24 years, I have heard this from many business owners. And what I commonly hear from them is, "Valuation is a complex and expensive process. I don’t have the time or the money for it." I’m big on the right size at the right time, and not wasting money.

It may surprise you to learn that there are low-cost online tools that can give you a quick and reasonable estimate on your business value or at least give you a market view on a selling price range for businesses like yours.

Ultimately, value is the lens through which you examine your strategy, your decisions and all the other metrics used to measure your business. When all is said and done, it will be the value of your business that will determine your ultimate success. Knowing your value today is the starting point of changing your focus and creating more value tomorrow.

Just what is the significance of determining the value of your business? It’s huge. A business focused on creating value:

• Creates a stronger company;

• Will grow faster and more profitably;

• Can better survive without all of the owner’s time;

• Will sell faster and for more money.

The reality? These better performing businesses can sell for up to three times more than competitive businesses with the same revenues and profit.

That’s not all. Valuing your business can tell you how you compare in the market, to your competitors and year-over-year to yourself. Business valuation is the ultimate business dashboard. By understanding where you rank in your industry, the value of your business and the value drivers, your business value becomes the key measure of your performance and provides a road map to the future.

What is the one thing you could do to get the most out of your business and make it more successful? Understand and build your business value. Where do you begin? Here are a few first steps:

1. Learn your current business value (use an online business valuation calculator that includes data on actual business sales) and check it periodically;

2. Determine your ultimate goal for your business and build a plan to make it happen;

3. Learn the things that create value in your business and industry, and manage them (see sample value drivers);

4. Look at your business as if you might buy it;

5. Spend more time on your business, not in your business.

If you do this, instead of what I typically hear, I know I’ll hear, "My business is growing, I’m making more money and I’m having much more fun. Focusing on business value has made a huge difference."

Sample Value Drivers

• Stable cash flow

• Careful asset management

• Goodwill

• Operating efficiency

• Loyal customers

• Diverse customers

• Infrastructure

• Effective operating systems

• Capital efficiency

• Scalability

• Reliable financial information (P&L’s)

• Strong management team

• Well trained, loyal workforce

• Barriers to competitive entry

• Diverse product offerings

• Clear rights to IP

• Cash reserves

• Support for deal structures

• Internet – social media

 

David Fein is the CEO of ValuSource, for more than 24 years a leader in business valuation solutions with the largest proprietary national database of business sales. Visit www.valusource.com or email him at
dfein@valusource.com.

Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

Brilliant overview David though you neglected to mention that your firm, ValuSource, has affordable software for company owners to estimate his/her company's value. Don't be shy -- it's a great tool. By Robert on 2012 09 07
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