“How big is your company?” When you ask the CEO of a public company this question, odds are they will respond with their business’ market capitalization, or value. Ask an owner of a privately held business the same question and you’re sure to get a very different answer. Usually, it’s sales, the number of employees, or maybe even the number of customers their company has. But why not market value? More importantly, shouldn’t your business value be something you’re constantly monitoring and can cite at any time?
While for some this may be hard to believe, many business owners don’t know what their businesses are worth. Even more, they are not focused on that metric as a performance indicator.
Typically, business owners focus on value when considering executing a business buy/sell transaction, but often little attention is paid to strategically positioning the company for a future sale, succession, or exit. This positioning can be crucial to execute years in advance of an actual event. If a business owner can look toward the future with a strategy, why not measure the progress toward maximizing enterprise value? This can go a long way toward navigating the company’s path and achieving the owners’ desired outcome.
One philosophy is to look at the investment in the company as you would any other investment you might make. Is this asset providing you with an adequate return for the risk you are taking? If you owned a publicly traded stock, for example, your adviser would evaluate strategies to buy, hold, or sell the stock.
A prudent strategy could be to value the business and establish targets for the growth in that value, just like you would for sales, gross profit, financial ratios and cash flow. Measure it. Engage in performance evaluation against it. Develop strategies to increase it, or to improve degradation in value. Another important consideration is to evaluate the market force’s effects on value. The industry may be consolidating—is the company a target, an acquirer or marginalized?
One could argue that business enterprise value really is the mother of all performance indicators. You can have positive trends on everything else on your dashboard but if your value is declining or not producing an adequate return for the risk it warrants… it may be time for a change in strategy.
At CFO Strategic Partners, we have positioned hundreds of companies for a successful sale, succession, or exit over the years. If you’re ready to grow your corporate wealth as part of your long-term goals, contact us today for your consultation.Tags: business valuation, company valuation, valuing a business, valuing a company