Last week I moderated a webinar for Pet Industry Distributor’s Association titled "Business Valuation: Why, When, and How?” As business owners and entrepreneurs, we tend to think of a valuation as a necessity only when we sell a business or in the unfortunate event of a death or divorce. But what I learned from my co-presenters, Travis Conway and Don Van Winkle, is that knowing the value of your business NOW creates a roadmap for success and drives healthy disciplines that will ultimately result in maximizing value.
Because you are taking the time to read this blog, your passion for reading about business bodes well for future success in all areas of your business. Thus you will need an exit strategy and a roadmap on how to get there. That exit strategy may be one of many things–passing it on to your children, selling to employees, or selling to an outside strategic or financial buyer – but eventually you will exit your business.
Why should you value your business now?
There are three critical reasons why you need to know the value of your business even if you aren’t planning to exit in the near future:
A. Building Transferable Value: Transferable Value is the actual and perceived monetary worth that a secondary party is willing to pay for your business. Whether a transaction is six months or six years away, when you fine-tune your business to be an attractive acquisition NOW, it maximizes transferable value TOMORROW. Don and Travis couldn’t emphasize this enough.
Six Key Steps Toward Building Transferable Value:
1. Clean up your books and records—be proud of your financial presentation!
2. Keep expenses separate. Every time you write off a personal expense towards your business, you are decreasing your transferable value.
3. Diversify and evaluate revenues and suppliers. Identify alternative revenue sources.
4. Recruit a three-person objective and dynamic Board of Directors. Authorize them to hold you accountable. I cannot tell you how valuable my advisory board was in helping me navigate through the pitfalls of running my manufacturing company, Avian Adventures.
5. Groom your senior management team. Investigate "appreciation rights” or "phantom stock options” as possible incentives. I love this idea. I’ll be writing about creating a Phantom Stock program in an upcoming blog.
6. Seek out legal, accounting, insurance and financing/investment banking relationships.
B. Raising Capital: Capital is scarce; give yourself an edge when it comes to attracting debt or equity. Performing a valuation will offer the business owner the following:
• Attracting Equity: Accurate pricing with realistic expectations
• Sophisticated Financial Dialogue: Speak to ROE, ROA, multiples, cashflow, etc.
• Financing Options: Understand the cost and effect on value
• Exit Options: Equity and debt partners will often demand an exit plan
• Budget Forecasts: Forecasting becomes more accurate and focused
C. Strategic Decision Making: A business owner who understands the value of his/her business and the impact of transferable value will make more informed strategic decisions.
• Establish a Baseline: Build and move forward from today’s value
• Gatekeeper Function for New Initiatives: "Will this add to value or distract?”
• Focus on Fundamentals: Know the effect of a change in revenues and margins on value
• Acquisitions: An informed acquirer understands value and prices all offers accordingly
• New Products/Services: Impact on transferrable value
• Key Executive Incentives: Align incentives and properly value stock/phantom stock
• If a Buyer Comes Calling: You will have an idea whether you are ready to discuss exiting your business if the value approaches "your number.”
I’ve sold three companies over my entrepreneurial lifetime and if I had only known them what I know now! I am sure my bank account would be fatter as I have no doubt failing to understand these principals caused me to leave some money on the table. So, once again—"Do As I Say, Not as I Did!”
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