Business Valuations: putting the “value” in “valuations”


BACK

Business Valuations: putting the “value” in “valuations”

There are a number of reasons why business valuations are done – maybe it’s the sale of a business or developing employee share option schemes.  It could be to resolve shareholder disputes or maybe to determine an appropriate market value for taxation purposes.

Providing quality business valuations is a growing part of the services we provide at dVT Group and we have found that from time to time clients ask us “how can we use valuations to improve our business and the value of our business?”

Our reply?  It’s all about the risk.  A key part of any valuation is assessing the risk of that business, and that impacts directly on the multiple that we use to crunch the final valuation numbers.  If a business is considered to have a number of risks, the multiple decreases, and this follows to impact on and decreases the business value.

So the answer to improving business value is to decrease the overall risk of a business.  There are a number of ways in which business owners can make changes to achieve this, many of these should and do work hand in hand with each other.

7 key factors that can help decrease the overall risk of a business are: 

  1. Consistency – by that we mean doing the business well and in the best manner at all times. You may not always be selling the same products or the same services, but you should always strive to conduct the business in the best manner at all times.  This in turn reduces the risk and uncertainty.
  2. Diversification – the highest risk is in a business that only does one thing or only has one major customer. That’s not to say that you have to be all things to all people and spread yourself too far.  The best way is to determine which customers and services provide you with the best profit margins and then concentrate your efforts on those.
  3. Processes and procedures – if you were selling your business, the purchaser would expect to be able to walk in the door on the first day, without you there, and take over the running of that business because you had all the systems, processes, customers etc, documented and able to be picked up by the new owners. That again decreases the risk because it demonstrates that all the knowledge about the business is not locked in the owner’s head!
  4. Planning and Reporting – this sort of goes with consistency; you should always have a current business plan that includes your marketing, products, staffing, financial and other goals and objectives and you should be using those plans on a regular basis. In other words, every month or quarter, reporting or summarising your results against expectations and understanding why those expectations were achieved or not.  This also just makes good business sense apart from increasing value, the quicker you know what is going on with the business, the quicker you can use that knowledge to leverage the good stuff and minimise or prevent the bad stuff!
  5. Innovation – there is, of course, a level of risk associated with innovation, so it’s a balancing act. A business that is always looking for new products or services to sell and is able to provide those with minimal disruption and loss of other business, is always more attractive than a business who keeps doing the same thing.
  6. Business structure – make sure the legal structure of your business is one that maximises protection of assets, including goodwill and any intellectual property, as well as plant and equipment.
  7. And always be ready for sale – even if you don’t intend to sell the business, run it like you are going to sign a sale agreement the next day. This means that the business needs to be clean, up to date, with a clear picture of where it has been, what it is doing and where it intends to be in the future.

There are many ways in which we can help reduce risk and maximise the value of your business.  If you would like help or advice in this area, give Suelen McCallum from dVT Group a call on 02 9633 3333.