The Value Matters Blog encourages companies to include business valuation in their routine business process, even before circumstances require a business valuation. By then, it could be too late to achieve the full spectrum of benefits delivered with a quality business valuation. Events such as the buying or selling of the company; acquiring financing; divorce or bankruptcy; retirement planning or ESOP transactions – require a thorough assessment of the business to come up with the company’s fair market value. Just as retirement planning requires forethought, business owners shouldn’t wait until they are in the hot seat to plan for one of these life changing moments either.
Why? A business valuation is the only true way to determine how the business is performing currently. Business owners may take pride, and rightfully so, in what they have accomplished with their business, but they must be in touch with the reality of the enterprise’s sustainability and profitability based on an objective evaluation of the company. In doing so, a business owner would be wise to act like a prospective investor picking at the nitty-gritty of the company to assess how desirable and potentially profitable it would be to invest in his business.
Steve McKee, president of McKee Wallwork Cleveland and author of When Growth Stalls: How It Happens, Why You’re Stuck, and What to Do About It, in his column in Businessweek, proposed seven questions an analyst might ask businesses to determine how their business is doing. Companies should answer these as objectively as possible, scoring from 1 (for awful), to 10 (for excellent):
1. Is the brand in a growing sector?
This is a measure of your industry as much as it is of your brand. Is it growing? Are economic, demographic, or cultural trends working in its favor, or are you witnessing steadily shrinking demand? Is this industry going to be healthy and growing—or for that matter even around—in two, five, or 10 years?
2. Is the brand making consistent share gains?
Regardless of the industry in which you operate, if your brand is healthy you should be taking market share from your rivals, and doing so in a sustainable way (i.e., not by giving away the store).
3. Does the brand have a dominant competitive position?
Your industry may be growing, your share may be growing, but has your brand achieved a position of dominance? This doesn’t have to mean global dominance; if you serve a well-defined geography, for example, it may be enough that you’re dominant within it, even if there are bigger competitors across town, across the country, or across the world. If they can’t horn in on your customers, they may not be relevant.
4. Is the brand clearly differentiated?
When prospects compare you to the competition, do clear differences arise or are you basically cut from the same cloth? This factor affects all of the other factors, which is why it’s so critical. One of my favorite pieces of marketing advice is, “Don’t be better. Be different.” If the people with whom you do business can’t clearly articulate your brand’s point of differentiation, an analyst certainly won’t be able to.
5. Are there high barriers to entry for competitors?
The airline industry has extremely high barriers to entry; it takes a lot of money—to say nothing of the regulatory hurdles—to get a new airline off the ground (pun intended). But it costs very little to launch a catering business or consulting firm. True, depending on the specialty, the expertise required to launch either of the latter two could be considered a barrier to entry, but an objective analyst would ask some pretty tough questions about how high that barrier really is.
6. Does the brand generate outstanding margins?
There are two ways to answer this question: in absolute terms and relative to your industry competitors. Margins, of course, don’t grow in a vacuum; if you’re clearly differentiated and operating in a thriving industry with high barriers to entry, you’re more likely to be able to maintain healthy margins than if you’re slugging it out in a commoditized, shrinking sector.
7. Is the brand creating strong cash flow?
There’s a lot of pressure on public companies to fund shareholder dividends. Just because your company isn’t public doesn’t mean you shouldn’t feel the same pressure. Your investors (that would be you—and any others who have staked their hard-earned capital on you) deserve a regular dividend. That is, unless you choose to reinvest most or all of your profits in growing your brand. But you should be in a position where the option is yours.
These clear-sighted and thought-provoking questions are considerable guidelines in reviewing your company’s performance. Based on the score you came up with for each item, you would have a better idea of the things to improve on for the business, and the strategies you can put into practice to improve them.
eBusinessAppraisals.com has over two decades of advising and deal-making experience with middle-market businesses. We are focused on value-enhancement techniques designed to maximize the value of businesses, and meet the exit strategy objectives of its owners.