Valuation creation involves assessing your company’s financial worth by developing a coordinated plan to improve profitability and cash flow to increase its overall value. Private equity companies perform these types of analyses on businesses they are targeting. Post acquisition they implement a plan to improve operations and efficiencies, and look for synergies to increase business value and create a higher return on their investment. Privately-held and family-owned businesses can take a similar approach to increase the value of their businesses.
Value creation requires a focus on performance and profitability through active management and strategic initiatives. There are several methods to determine the value of your business, but some commonly-used metrics include a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), revenue, discounted cash flows, or in certain circumstances, intellectual property (e.g., technology). The appropriate revenue or EBITDA multiple depends on a variety of factors including your industry, financial performance, and market share, among others.
Here are eight focus areas for increasing your business’s valuation:
- Operational Improvements – Identify operational inefficiencies and develop a strategy to implement improvements. This will involve streamlining processes, optimizing supply chains, and enhancing overall operational efficiencies.
- Cost Reduction – Review product and service cost structures to improve margins. This may involve implementing cost-saving technologies, renegotiating contracts, or restructuring the business to eliminate certain costs altogether.
- Revenue Growth – Driving top line growth can be crucial to value creation. Complete a thorough review of all service and product lines to determine which are profitable and have future growth potential versus which have poor performance and are losing money. By analyzing each line’s revenue and margins, decisions can be implemented to grow existing markets, expand existing product or service lines, identify and pursue new market opportunities, and enhance sales and marketing strategies.
- Acquisition Opportunities – Companies can expand their market presence, improve or acquire technologies, and find synergies through strategic acquisitions. This can enhance your company’s growth, improve market competitiveness, expand geographical reach, and increase efficiencies.
- Talent Management – Recruiting and retaining key talent is essential for your business to thrive. Identifying areas to enhance your management team’s skill set will enable your company to execute strategic initiatives and drive future growth.
- Technology – Utilizing technology to improve operational efficiency and control costs is necessary in today’s competitive business environment. Having technology that provides data your management team can analyze and use to make critical decisions to improve and grow the business is essential for value creation.
- Strategic Planning – Work closely with senior management and outside advisors to develop and execute strategic plans. Strategic planning should include developing and setting clear objectives at company-wide and departmental levels, defining key performance indicators, and monitoring progress towards stated goals.
- Governance and Oversight – Ownership and management need to have an active role and provide the necessary expertise and oversight to ensure that the strategic plan is executed, adjustments are implemented timely, and accountability is maintained in the process. Ownership and management need to consider the use of external sources – attorneys, accountants, investment bankers, and other professionals with industry specific experience – for expertise that may not be available in-house.
These eight factors can drive value creation and improve your business by increasing profitability and cash flow, expanding market share, opening new geographic markets, and identifying product and service lines that are more aligned with company goals. If you’re interested in learning more about how you can increase your business valuation, please contact us.