Use valuation practices to improve performance today
The sooner you start thinking about valuation, the better. Many of the elements that influence sales and acquisitions can also boost performance and company culture today.
For example:
- Pay close attention to incremental investments that increase the value of your firm.
- Look at your firm’s concentration of ownership and employee retention.
- Watch out for overreliance on a few key customers.
- Add forecasting skills to your financial tracking disciplines (buyers buy the future).
- Prioritize the human side of business performance.
Don’t view valuation events as insurance — something to avoid thinking about until you absolutely must. If you get value drivers in order now, you’ll be ready to move when the right opportunity comes along.
To use valuation practices to improve performance and add value today, follow these five tips:
1. Adopt an investor’s mentality toward business value
What does it mean to adopt an investor mindset? It could involve expanding capacity or replacing outdated equipment. It may mean identifying and addressing risk factors that you can control. For example:
- Do you know the age and condition of your key assets?
- Is your customer base diversified?
- Are critical processes documented?
- How leveraged is your business as it’s structured today?
- Is your management overly reliant on one leader?
These are tough questions that investors could ask. Knowing the answers could improve performance and drive value today.
2. Look critically at your management structure
Serious buyers and potential M&A partners will scrutinize the relationship between owners and key employees and the future value of the company. Your business value could be discounted if operations are too reliant on key employees.
To protect your business value, establish standard operating procedures and processes. Makes sure the business can operate effectively without those employees.
Another option is to create incentives that reward key employees for staying with the firm through a transition. For example, top performers could be offered some form of an ownership stake to help boost long-term value.
3. Stay vigilant about customer concentration
Many business owners fail to consider how their client mix could affect potential buyers. Buyers are purchasing the future cash flows of your business — not today’s. If you depend on any single customer for more than 10% of your revenue, this could make your company look vulnerable to buyers.
The sooner you start considering customer concentration, the sooner you can adjust your book of business. Reduce dependency on individual accounts to stay profitable into the future.
4. Balance history and the future in your financial reporting
The traditional valuation process often starts with a look back at your last two or three years of financial performance, but that doesn’t tell the whole story. Owners and principals need to develop forecasting skills to predict future financial performance.
Accurate forecasting will help you manage the business more effectively today and provide confidence in future cash flows for potential buyers.
5. Account for human factors
Many owners worry that valuation practices will alarm employees and cause them to think their jobs are at risk. The best remedies for this are transparency and inclusion.
Everyone at the firm needs to understand that value awareness benefits their personal stake in the firm’s success. Making value conversations a regular part of routine business checkups can make your firm a better place to work.
How Wipfli can help
We help companies increase the value of their businesses, whether or not they’re actively engaged in M&A. Our succession planning, ESOP programs and valuation strategies are designed to boost your overall financial health. Contact us today to learn more.
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