What is my company worth?
I get this question a lot from business owners. They would normally like to hear a simple answer and many times are disappointed with the answer. I don’t make up the rules for business valuation, but I can help you understand what goes into and how to prepare your company.
Let’s start with what valuation is not. Valuation is not what the value of the company is in the hands of the current owner. In the context of selling your company, the value of your company is based on what the value of your company is in the hands of a third party – a buyer or acquirer. Put another way, its “transferable value.”
Identifying the value (drivers)
If the value of your company is determined by what is perceived as value to a third party, a business owner should always be focusing its management decisions on the drivers of value.
A value driver is a characteristic of a company that will either reduce an inherent risk associated with owning a company in your industry, or one that will increase the chances of continued growth and profitability into the future. Examples include: consistent and predictable earnings, reliable financial statements and proprietary items.
In the end, how your company addresses and performs in these areas will go a long way in determining what your company is worth – its selling price or transferable value. The better you perform in these areas, the higher on the range of value your company will be. Conversely, if your company performs poorly in these areas, the lower your company will be valued.
Think long term
The beauty of asking business owners to identify and study the value drivers of their companies is that whether in the context of preparing a company for sale or not, these characteristics are also key elements to any successful business. After all, your company may not sell for a long time, and usually these are not things that can be properly addressed in a few weeks, months or even years before an actual sale.
Frank Orlando is a partner at Oak Hill Business Partners in Brookfield.