As a business owner or leader, do you have a firm understanding of the business’s value? Do you know with certainty how much value you created in the past year? Can you pinpoint where in your business value is being created and where it’s declining? If the answer to any of these questions is “no,” you could be putting the future of your business at serious risk.
It is a common occurrence that I see businesses with various business interests. There are some areas of the business doing well and other areas doing less so. What I do not see is a value analysis as to why this is happening. Could it be that the business areas performing well are in promising industries while the other business areas are in a declining industry where valuations are at an all-time low and unlikely to rebound? What makes things worse, I still see business leaders who do not have this value mindset and hence instead of devoting the bulk of their time and energy to making the well-performing businesses better, they use the bulk of their time trying to fix the struggling business area. This is mostly seen in family businesses, where their rich histories and traditions (which are usually among their strongest assets) can become liabilities if emotional attachments cause leaders to hang on too long or resist embracing new directions.
The reality is that most owners of SMEs and family businesses operate from day to day with no clear understanding of their value. That’s because busy executives often assume there is no easy way for them to determine value and simply put the subject aside. Many SME and family business leaders see third-party valuations as complicated, time consuming, intrusive and expensive. Thus, they undergo them only when they must — for example, when seeking capital for growth.
Despite these challenges, if you own or manage an SME or family business it’s imperative that you conduct a detailed valuation on a regular basis. At least once a year. Think of it in the same way as when you go to your doctor, to do your routine health check up — an essential step to find out what is going right, and more importantly, what may be going wrong. Then, you can take corrective action before it’s too late. You could avoid spending precious resources courting the wrong customers, trying to grow areas of your business that are inevitably declining and failing to recognise and invest in your areas of greatest opportunity. Plus, if you’re approached by a buyer interested in acquiring your company, you’ll be prepared to respond and negotiate.
EMCS’s approach to Valuation
To make the valuation exercise easier and more complete, we developed our own approach to the valuation exercise. We do not just ask for financial statements of the business and then sit down with business leaders firing future foretasted numbers. We take a different approach.
Besides reviewing the past financial statements, we then take a deep dive of all aspects making up the business. The internal business structure, the internal business governance, the internal capability for strategy formulation. We also have a 360 degree external view of the market the business is involved in, the type and amount of competitors, the opportunities and threats in such a market. We ultimately proceed to link a SWOT analysis to the business valuation.
Thus, our approach to a valuation exercise emphasises a close analysis of your any business’s most important value drivers and those characteristics that make a business unique – be it the quality of leadership to pricing power to brand equity. We believe that a thorough and honest appraisal of these value drivers is essential to calculating a company’s value. This means that our approach includes an appreciation of the qualitative aspects of a business which most other valuation methods ignore.
Then, we can use all this to base future forecasts on all this information. We can also use market-rate multiples of public companies to assess the value of businesses similar to yours. In the case of a privately owned SME, we will adjust to lower multiples of M&A transaction of larger public companies.
So I hope that you have now understood that knowing on a frequent basis the exact value of your business is important, as it will allow you to:-
- Avoid selling your business at a discount to its true value.
- Better focus on how to improve your business by enhancing your value drivers.
- Create a strategic plan that has value creation as the centerpiece.
- Incentivise your staff based on the value they create rather than using revenue or EBITDA targets.
Having an exact value of your business is a necessary strategic planning tool and not a one-off event when raising capital or when selling the business.