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(*3*) the value of a company is not only about adding up revenues and subtracting expenses. While necessary, these hard numbers are only half of the equation for calculating company value. To determine true value, we also consider factors equivalent to the owner’s level of commitment, company goals and development opportunities. When we use the full equation, we get a comprehensive picture of the company and can higher understand its history, past, present and future.
The calculations may vary from company to company, but in a healthy company there is roughly a 50/50 split between the quantitative (financial) and qualitative (non-financial) sides of results. If the business is not profitable, it is more necessary to focus on the quantitative side and work out the numbers first. Many owners don’t need to listen to this, but if they are not getting satisfactory results, it might be a sign that the business is not working. They need to resolve quantitative problems before moving on to the qualitative side.
For healthy corporations trying to maximize their value, quality metrics may be divided into three predominant categories.
Quality check
1. Owner’s goals
We found significant research showing that if an owner has defined goals and future plans that are aligned with market expectations for the value of his company, his exit might be much stronger. What is the owner’s goal in leaving the company – to make as much money as possible, take care of his employees, and provide a legacy? Then you have to get to the “why” of your goals and develop an motion plan. It almost doesn’t matter what the answers to the questions are; having achievable goals and a strategy to attain them can increase the value of the company because it allows the owner to focus on improving other areas of the company.
2. The role of the owner
The level of owner engagement is a critical indicator, but perhaps not for the reason you think. The more involved the owner is in the day-to-day operations, the more central he or she is to the business less the business might be profitable in the future. If the owner is the lynchpin that holds the whole lot together, what happens to the company when they leave? Operations evaluation is more about the system and team structure. Look at the organizational chart and who is on it – are they good or bad employees? Check the company’s processes and procedures, in addition to how latest team members are trained and onboarded. The owner sets the vision, but it is the team that increases the company’s value by implementing the vision.
3. Development opportunities
Nobody desires to buy a company and keep it because it is. They need to see future growth potential, especially return potential on their investment as a buyer. Whether it’s a easy price increase or latest locations, whoever buys the company might be asking about growth opportunities. Metrics equivalent to product or service diversification, each inside a company and inside the industry it is in, give a good sense of whether a company is moving forward or stagnating (and at risk of going backwards). The more potential you show, the more advantages the next owner will receive, which translates into greater value.
The cycle of success
When the qualitative side of the equation works, the whole lot is connected. The owner knows the goals that are tied to the direction of the company and leads the organization, but works independently outside of day-to-day operations; the company is developing and creating greater development opportunities for the next owner. Combined with profitable numbers, this is a cycle that builds a high-quality business.
For the best owners, it takes at least three to 5 years for this cycle to work and achieve reliable indicators of your value. Even higher is to include it into your 10-year strategy.
At Exit Factor, we have 62 different qualitative metrics that we use to find out company value. We don’t use all of them, or anywhere near them, in every company; it is often a matter of adjusting three to 5 of the 62 indicators. Find out which of these 62 are essential to your business, and you may have a truly future-proof strategy for profitable growth.