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 one 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, it’s “transferable value”.

Identifying The Value (Drivers) Of Your Company

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 specific 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.

In the end, how your company addresses and performs in these areas will go a long way in determining what your company is worth – it’s 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 company is that whether in the context of preparing your company for sale or not, these characteristics are also key elements to any successful business.  In other words, it’s just good business practice to always be working on enhancing these characteristics.  After all, your company may not sell for a long time, and usually these are not things that can be properly addressed a few weeks or months, or even years before an actual sale.  So, it’s important to always be working on these value drivers.

Example of Value Drivers

There are several examples of value drivers, and I want to indentify a few here and I will write more about these in greater detail in my next post.

• Consistent & Predictable Earnings (Cash Flow)
• Reliable Financial Statements
• Intellectual Property & Brand Identity/Awareness
• Proprietary Items
• Robust IT & Financial Systems
• Contracts/ Recurring Revenue
• Diversified Customer Base
• Strong Management / Human Capital

Each of these value drivers has an effect on the value, and will either increase or decrease the multiples typically used for a company in a particular industry.  Identifying and mastering them will not only make your company more valuable and give you more money when you sell your company, but it will also make your company a better, more profitable company in the mean time.

To learn more about the Value Drivers and what your company is worth, contact Frank J Orlando at Oak Hill Business Partners.

Frank Orlando is a Partner with Oak Hill Business Partners and a veteran business broker and M&A professional.  He leads the Business Sales and M&A Advisory Services practice for Oak Hill.  Not only does Frank have deep experience as a trusted advisor to business deals, he has also been a buyer and seller of businesses as well.

Oak Hill Business Partners is a Milwaukee, WI based firm focused on the growth of small and mid-sized firms needing expertise in finance, sales, marketing, operations, or mergers and acquisitions.  Oak Hill serves the Upper Midwest with partners based in Milwaukee and Indianapolis.   In 2012 and again in 2013, Oak Hill was named to the Milwaukee Business Journal’s List of Top 25 Management Consulting Firms Serving Milwaukee.