Maximizing your business value is easy to envision, but may be difficult to implement and accomplish. It is important to know where you are starting from in order to take the correct steps to increase the value of your business. At Synergetic Finance, we begin most client engagements by completing a formal business valuation or an informal business assessment to establish a correct starting point depending on our specific client’s need.
The deeper a valuator or advisor is able to dive into your business issues, the better the solution that can be created, further implemented, and subsequently monitored. Figuring out where you want to go with your business is a matter of closing the gap between where you are now and where you want to be. We have developed the following three steps to simplify this process which can be applied to all kinds of business situations.
1) Determine your gap: After determining where you are starting through a business valuation, the next step is to determine the gap between your starting point and your ending point, or objectives. This can be a short or long process depending upon your clarity around your objectives. Knowing where you want to be is just as important as knowing where you are starting. Both points determine the time frame needed to accomplish your objectives. Many sophisticated models explain key areas of economic risk and benefit. Given your particular issues, the multiple perspectives on value, and the large number of valuation methods to deploy, it is possible to develop relative accuracy around the starting point.
However, it is more difficult to plan around future events that often happen differently than one’s expectations, and to manage the chaotic process of change. An endpoint may start out general, then become specific, like acquiring a specific retirement income or establishing a target sales price for an exit sale. However, planning where you want to be is more important than exact granularity at this point. Going beyond the numbers, and knowing what’s behind them can help your financial advisor develop good plans that are likely to be accomplished. Your plans may need to be revised based on your motivations and the time needed to achieve your goals. To develop workable strategies to close the gap, it is important to have a well thought out estimate of both your starting and ending values.
2) Measure the size of your gap: The next critical step to closing the gap is to ask yourself “how big is my gap?” Realistic strategies help generate realistic results. The gap represents a measurement between your actual and desired financial resources. The equation used to define value is often expressed as economic benefit divided by risk. Knowing the size of your gap is a matter of knowing how much lower your economic benefits and how much larger your risks of achieving those benefits are than you want them to be.
To explore the magnitude of your gap, some of the following questions help:
- Is there a gap between what you have and what you want?
- How great is your gap, and is it due to low economic benefit, high risk, or both?
- How will you close the gap to accomplish your goals?
Moving beyond the measurement process to implementing activities that close the gap, it is important to know the size of the gap, and how long the process might take.
3) Close the gap. The next step is to go create more value. The process of closing the gap between what you have and what you want is a matter of value engineering to improve business value through decreasing risks around cash flows, or increasing the cash flows through improving sales or cutting costs.
Another way is to keep things the same, but decide to delay retirement (adding time for more savings) or reduce retirement spending (to live within your current means). The best way to maximize value within your firm is to identify relevant value drivers and develop a value based strategy. A few examples of key value drivers include the customer base, margins, human capital, intellectual property, and market position. Exploring ways to increase value through these business components is aided with the help of value-enhancing actions and practices. Building a strong brand name, increasing competitive advantages, and establishing systems or procedures can have a long lasting effect on value. Achieving your targeted end point may then result in a new beginning that generates additional growth.
If you would like to further explore how a Business Valuation can help you, please call Synergetic Finance at 206-386-5455. These topics and more will be discussed at our event on May 7, 2013. Please email email@example.com for more details!
To your success,
Mark Girouard, MBA, AVA, CMA&A