What factors, both internal and external, influence the conclusion?
The internal aspect of a valuation exercise concentrates on your employees, your systems and procedures, and on the products and services you sell. How do they compare with your competitors both in your own industry as well as in other similar industries? If your people, products, systems and procedures are not ‘best of breed,’ what can you do to change them? You may need to determine how trends and developments in governmental regulation, both on a national as well as a local level, affect your operations. Often in a recession, it is possible for well-positioned companies to make dramatic increases in their market share as weaker rivals falter. Finally, a valuation analysis may result in you making necessary modifications to your internal cost structure.
Looking at your company from an external perspective takes a different approach. A potential buyer of your business would probably examine it using three main methods, commonly known as the income approach, the market approach and the asset approach.
The income approach estimates current and future net cash flows over a time period extending into the future and then applies an appropriate discount rate to arrive at a present worth given the risks, uncertainties and competing demands for capital. A market approach looks for actual sales of comparable companies, then makes adjustments for the unique aspects of your company in relation to them. An asset approach takes a detailed and hard look at your company’s balance sheet and adjusts individual assets and liabilities to their fair market values.
Once a value has been established, then what?
Once you’ve completed this analysis, you should have a more targeted picture of the necessary adjustments your company should make to improve its performance. You’ll still have to execute those strategies in the marketplace every day, but at least you’ll have been diligent and thorough in seeing both the trees and the forest as they exist in harmony. You will have a greater understanding of the value you might ultimately receive for your company. You’ll also have a starting point and a roadmap to pursue in order to achieve your long-term objectives and attain the growth and value you want to realize for your company in the future. In order to stay on course, you may want to consider implementing an employee bonus structure to empower your human capital with appropriate incentives to help them achieve your company’s targets in the business plan.
Adam S. Minow, CPA, MBA, CFF, certified valuation analyst, is a manager for Glenn M. Gelman & Associates, Certified Public Accountants and Business Consultants. Reach him at (714) 667-2600 or [email protected] or visit www.gmgcpa.com.