For finance executives, keeping track of your company’s valuation is important for several reasons. Whether all or part of your business is getting acquired, you’re raising funds through debt or equity, or simply maintaining the smiles on shareholders’ faces, a good grasp of how to maximize your business valuation will be, well, valuable.
This article conveys how you could manage and maximize your company’s valuation to prevent it from being undervalued in the case of a merger, acquisition, or funding. Before we jump into the vital business valuation tips, let’s understand why you must manage the value of a business.
Why manage your business valuation?
As a business owner, over 85% of your net worth is tied to your business. You’re not alone. More than 90% of Jeff Bezos’ fortune is tied to Amazon alone. And that’s a good thing. It shows that you believe in what you’re building. That, in turn, inspires you to maximize its value. With most of your worth tied to your business, being able to get the best return on its sale means a lot, undeniably.
Alternatively, a good valuation puts you in a good position when raising funds for your business. You don’t want to hand out big slices of your company to underpaying investors. Therefore, you have a real need to effectively manage and maximize the value of your business. The tips below will inform you on how to go about it.
5 tips to maximize the value of your business
- Don’t obsess over short-term earnings
In 2006, Alfred Rappaport, a Professor Emeritus at Northwestern University’s J.L. Kellogg Graduate School of Management published an article on the Harvard Business Review where he wrote that senior management obsessing over impressive short-term earnings reports are doing their companies no good. A focus on impressive short-term earnings can come at the expense of value-creating projects. Leaders find themselves under immense pressure to meet the short-term expectations of shareholders who they have led on. So, they underinvest in important endeavors like valuable product creation, research and development, and maintenance.
Although impressive quarterly earnings reports could positively influence stock prices in the public market, seasoned investors, institutional investors, and acquiring companies know a valuable company when they see one. Instead of obsessing over impressive short-term earnings reports, give yourself the long shot. Think about your company’s position in the far-sighted future
- Focus on high-value processes, assets, and products.
How you spend your resources significantly affects your company’s value. Is the business funding a personal life of extravagance or luxury? Are you pouring money into projects of low value?
Your business may be generating high revenue but how much you retain (your margin) will determine how investors value your company. The business margin is affected by everything from funding your personal life to running the value-generating day-to-day business processes.
Therefore, to ensure that your business is generating a good return for every dollar spent, focus your energy on high-value-yielding assets and processes. For instance, you can focus on research and development which generate significant value to your business and helps increase your market share acquisition. Then manufacturing could be outsourced to those that can get it down at lower costs.
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- Make strategic decisions with long-term impacts
As markets change and the future gets less predictable, strategically position your business to weather future challenges and generate greater revenue long into the future. Some big businesses do this by acquiring promising startups to gain positions in emerging markets.
Whether you are deciding to acquire a business, sell off a part of your big business, or agree to collaboration deals, ensure that your decisions are forward-looking. This can significantly increase your company’s value as investors regard your place in a soon-to-come future.
- Build an auto-pilot (or semi auto-pilot) model
Companies that can operate well without the founding teams are very attractive to acquirers and investors. Sometimes, business owners sell off companies to pursue new adventures, start a new company, or retire. When this happens, a business that is built around the owner may have difficulties thriving after the sale. Investors know this. So, they place a high value on businesses that can proceed with minimal supervision from the owner. With this in mind, you should consider building business processes that can run with minimal input from you.
- Improve investors communication
Transparency wins hearts, including those of hardened investors. In reports, improve disclosures to suppress investors’ uncertainty. With increased confidence in your business, your cost of capital reduces significantly and the value of your business travels the opposite direction. This openness has more impact than simply improving investors’ confidence. It shrinks the urge to focus on impressive reports with unsustainable short-term earnings. Therefore, do the diligence of communicating with investors and the public as openly as possible.
Value is perceptual and a lot of factors play out when it comes to the value of a business. Some of them are market share, investors sentiment, and value proposition. To maximize your company valuation, you have to create a good mix of these factors.
First, ensure to focus on the long-term value of your business. Then focus on winning investors’ confidence with transparent reporting. Also, try to build a self-sustaining business that can thrive in your absence. With these things together, it wouldn’t take a crystal ball for evaluators to see the value you offer.
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