Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
The opinions expressed by Entrepreneur contributors are their own.
Determining the value of a company is not just about adding revenue and subtracting expenses. While these hard numbers are an important part, they are only half the equation for calculating company value. To determine true value, we also consider factors such as the level of ownership involvement, company goals, and growth opportunities. Using the full equation gives us a comprehensive picture of a company and helps us better understand its past, present, and future.
The calculations may vary depending on the business, but in a healthy business there is about a 50/50 split between the quantitative (financial) and qualitative (non-financial) sides of performance. If the business is not profitable, it is more important to focus on the quantitative side and fix the numbers first. Many owners don't want to hear this, but if they aren't hitting their numbers, it may mean the business isn't working. They need to fix the quantitative problems before moving on to the qualitative side.
Related: What is a balance sheet and why does your business need one?
For healthy companies that want to maximize their value, the qualitative indicators can be bundled into three main categories.
Evaluate quality
1. The owner’s objectives
We have found extensive research showing that an owner who has defined goals and plans for the future that are consistent with market expectations for the value of their business will have a much better exit. What is the owner's defined goal for exiting the business – to get as much money as possible, take care of their employees, and secure a legacy? You then need to figure out the “why” behind the goals and develop an action plan. The answers to the questions almost don't matter; having achievable goals and a strategy to achieve them can increase the value of the business because it allows the owner to focus on improving the other areas of the business.
2. The role of the owner
The level of involvement of the owner is a crucial indicator, but perhaps not for the reason you think. The more involved the owner is in the day-to-day operations, the more central they are to the business, the less the business will be worth in the long run. If the owner is the linchpin that holds everything together, what happens to the business if they leave? Evaluating operations is more about the system and structure of the team. Look at the organizational chart and who is on it – are they good employees or bad? Examine the company's processes and procedures and how new team members are trained and onboarded. The owner sets the vision, but it is the team that drives company value by executing the vision.
3. Growth opportunities
Nobody wants to buy a business and leave it exactly as it is. They want to see growth potential for the future, especially the potential for a return on their investment as a buyer. Whether it's a simple price increase or new locations, whoever is buying the business will be asking about growth opportunities. Indicators such as product or service diversification in both the company and the industry it operates in provide a good indication of whether the company is making progress or stagnating (and in danger of going backwards). The more potential you can demonstrate, the more benefits there will be for the next owner – and that will lead to greater value.
Related: 8 factors that determine the financial health of a company
Cycle of success
When the quality side of the equation works, everything falls into place. The owner knows the goals that align with the direction of the company and runs the company but works his way out of the day-to-day operations; the company grows and creates more growth opportunities for the next owner. Paired with profitable numbers, this is a cycle that builds a quality company.
The best owners need at least three to five years to get this cycle working and to have reliable indicators of their value. Better yet, incorporate it into a 10-year strategy.
At Exit Factor, we use 62 different qualitative indicators to determine company value. We don't use all of them, or even close to all of them, for every company. Typically, three to five of the 62 indicators need to be adjusted. Find out which of these 62 indicators are important for your company and you'll have a truly forward-looking strategy for profitable growth.
Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
