As business owners look ahead to the future, many of them are planning on how to transition out of their company. Given that a business owner’s greatest asset is generally his or her company, it’s important to understand the business’s real worth well before it’s time to exit. A proactive business valuation performed well before an ownership change can provide an owner with a roadmap for improving the bottom line, driving profit and increasing overall value over time. Ultimately, this means a more favorable payoff when the time comes to execute a succession plan. “To maximize business value, owners need to develop a strategy to build institutional value,” says Barry Worth, member and director of mergers and acquisitions, Brown Smith Wallace LLC, St. Louis. But aside from simply determining the company’s worth, an owner should dig deeper and work to understand the various components of a business valuation. What areas of the business are driving value and what parts are profitable? And just as important, what departments or product lines or people are not contributing to the bottom line? “A proactive business valuation is about looking at the value of the company, then reaching below and peeling off the layers to identify what components of the business are really driving value,” said Bill Willbrand, tax and accounting member, Brown Smith Wallace. Smart Business spoke with Worth and Willbrand about how a business valuation can serve as a strategic growth tool for your business. Why should a business undergo a business valuation years before an ownership change? By performing a business valuation well before initiating any sort of exit strategy, you can create a baseline, a planning document to use as a roadmap for building value. A valuation can help you focus on key components of the business, understand what areas of the business are really driving value and identify weak spots that are detrimental to the worth of a company. For example, a valuation may show that a certain product line is not actually contributing to the financial success of the company. This might be a surprise to owners, who never fully investigated the product line’s contribution from a value proposition perspective. Based on these findings, the company can set goals to eliminate or sell off the product line and focus its energies on areas of the business that have the greatest impact on profitability and long-term value. A business valuation forces you to really tease out value drivers and spoilers, and it gives you a baseline so you can develop a plan and begin to measure progress.
