Running a privately held business can be both challenging and rewarding. As a leader, you have the opportunity to make a difference, set and achieve your own purpose, and create a culture that aligns with your beliefs and values. However, many leaders often overlook the importance of business valuation due to various reasons.
The valuation of your business is crucial for long-term success, allowing you to leave a lasting legacy, realise the value of your investment, and motivate your team towards a shared outcome.
Let’s explore the significance of the valuation of privately held businesses and discuss the key reasons why leaders tend to neglect it.
By addressing these obstacles, you can develop a strategic approach to growing the value of your business.
We will also provide a comprehensive checklist outlining the essential areas to focus on to enhance your company’s value.
By implementing these strategies, you can significantly increase the worth of your business over time.
The Importance of Valuation
Business valuation plays a vital role in the success and sustainability of privately held businesses.
While initiatives such as setting core purpose, values, and ambitious goals are essential for a well-aligned and motivated team, they may not explicitly focus on improving the business valuation.
However, your pursuit of purpose should always prevail, even in the face of potential tension between objectives and business valuation.
A business with a strong culture and a commitment to its beliefs often drives profits and financial success in the long run.
Focusing on increasing the valuation of your business is essential for several reasons.
First, it provides an avenue to sell your business and leave behind a legacy that transcends your own tenure.
Second, it allows you to realise the value of the years of risk-taking and investment you have put in.
When shared with your team, focusing on business valuation can motivate and align them towards a common goal.
Actions taken to enhance business valuation often bring intangible benefits, such as peace of mind and a sense of security.
Challenges Hindering Growth of Business Valuation
Despite the importance of business valuation, many leaders face challenges that impede their ability to build it effectively.
Understanding these obstacles is crucial for overcoming them and creating a foundation for sustained growth.
1. Minority Voice: In many businesses, there is often only one or a few shareholders whose voices may be drowned out by market demands, customer needs, and staff concerns.
We usually put the well-being, pay and focus on supporting our staff ahead of ourselves.
Prioritising the shareholder value perspective can be challenging when other stakeholders’ interests dominate decision-making processes.
2. Lack of Understanding: Most business owners/founders sell their businesses only once in their lifetime, making them unfamiliar with what investors look for in a company.
Without the knowledge and experience to comprehend the drivers of business valuation, business owners may struggle to create strategies that maximise their business’s worth.
3. Insufficient Capacity: Projects aimed at driving business valuation are often categorised as “important but not urgent.”
As a leader, you might find it challenging to shift your focus from working “in the business” to working “on the business”.
This lack of leadership bandwidth inhibits the allocation of resources necessary for growing your valuation effectively.
4. Difficulty of Actions: Many companies rely solely on profit-based incentive schemes for prominent leaders.
While profitability is a crucial factor, it does not encompass all the elements that contribute to value.
Achieving the components outlined in the business value checklist requires significant effort and resources, making it a daunting task for business owners.
5. Misplaced Idealism: Some leaders feel uncomfortable prioritising business valuation, perceiving it as selfish or materialistic.
They might believe that leadership should solely revolve around purpose and vision.
However, a successful business can strike a balance between purpose-driven endeavours and generating value.
The 8 Core Factors That Will Increase Your Business Valuation: The Checklist
To cultivate shareholder value effectively, leaders must take proactive steps to address the challenges outlined above.
Although building your business’ valuation is a long-term process, starting early and consistently focusing on improvement is crucial.
The following checklist highlights eight key areas that investors value in businesses and often fall short in privately held companies:
1. Financial Performance: To ensure long-term success, it’s essential to evaluate the profitability, growth rates, and financial stability of your company’s performance. This will help you make informed decisions and maintain sustainability.
2. Market Positioning: To strengthen your position in the market, it’s essential to evaluate your market share, competitive advantage, and differentiation strategies.
3. Growth Potential: Discover possibilities for expansion, diversification, and innovation that can showcase your business’s potential for growth.
4. Intellectual Property: To protect your unique assets, it is vital to safeguard your intellectual property by obtaining patents, trademarks, copyrights, and trade secrets.
5. Management Team: It is crucial that you establish a solid and capable management team that can effectively lead growth, make well-informed choices, and adjust to any changes that may arise.
6. Operational Efficiency: To enhance operational efficiency, it’s important to optimise and document your business processes, reduce costs, and improve productivity. It’s ideal for a potential buyer to be able to review your methodology and systems and feel confident they can run the business even if you’re not present.
7. Customer Relationships: Strengthen customer relationships and increase satisfaction by providing them with exceptional service and experiences. Encourage your customers/clients to leave reviews and testimonials to showcase their positive experiences.
8. Risk Management: You can reduce potential risks by utilising efficient risk management tactics, such as developing backup plans, obtaining insurance policies, and adhering to compliance regulations.
Understanding your company’s value is a critical endeavour for all business leaders.
You can maximise your business’s long-term success and relevance by recognising the importance of business valuation and addressing the challenges that hinder its growth.
While purpose and vision should guide your actions, they can coexist harmoniously with a proper valuation of your business, ultimately leading to a successful exit.
Remember, the journey toward building shareholder value requires dedication, persistence, and a strategic approach, but the rewards are well worth the effort.
When working with our Scaling Up Clients, our overarching goals are to 2X your cash flow, 3-5X your industry average profitability, and 10X your valuation, all with less drama and more fun.
Get in touch to talk about growing the valuation of your business.