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Archive for Business Strategy – Page 3

Realizing the True Value of your Business

Posted by Linnea Blair on
 12/31/2007

f you are planning to sell your business, it’s clearly an advantage to have an objective idea of what it is worth. Even though ultimately a business is worth what a buyer is willing to pay, it’s easy for a seller to undervalue and lose out in the deal or to unrealistically overvalue and miss out on attracting buyers.

Many companies are oddly reluctant to invest in getting an accurate valuation. Even among owners who had tried to sell their business at one stage, a survey reported by CFO.com found that only 12% of them had ever had a formal valuation done. This is surprising. Guessing the value to put on your biggest asset is really risking your future.

There are a number of different valuation methods and different methods may be appropriate for different types of business. For example, if you run a services business there’s little point in evaluating it based on the value of its physical assets. Other methods consider intangibles such as ‘goodwill’, which are difficult to put a figure on but can represent a significant element of the value of some businesses. And value may also be in the eye of the beholder – it will actually be worth different amounts to different people depending on their reason for wanting a business.

A variety of factors are taken into account in ensuring that a valuation is accurate and useful. Primarily, the valuation needs to be in line with hard data, particularly your current and past financial position. Some valuation methods focus on financial data such as profit levels, asset value, cash flow and debt carried by the business. Other factors are not so cut-and-dried. The valuation might incorporate financial projections for the next three to five years. It might consider intangible assets, such as intellectual property like patents and trademarks, brand names and goodwill. You also need to consider the context. Your own company may be doing very well but its value will be diminished if it is part of an industry that is in serious difficulty or in decline overall.

There are over a dozen different valuation methods. The crudest methods operate by rule-of-thumb or ‘multiples’. For example, landscape businesses are estimated to be worth 1 to 1.5 times their discretionary earnings plus the value of their capital assets. However, multiples only give a rough, industry wide ballpark figure for business value. They do not necessarily give the real value of a particular business. More accurate methods include the ‘balance sheet’ approach, which basically subtracts business liabilities from assets. The ‘adjusted book value’ method is similar but uses current market value rather than purchase price or depreciated value.

Retail and manufacturing businesses are generally assessed according to the value of their assets, given that they tend to store large amounts of value in their inventory or capital assets while service company valuation is based on the ‘capitalization of income valuation’ method, which places a heavy emphasis on intangible assets. It’s also possible to calculate the value of a private company by comparing it with an equivalent public company and making appropriate adjustments. Business value can also be estimated by anticipating cash flow over a three to five year period and adjusting that into current dollar terms.

A current valuation can be important at times other than sale. There are numerous business and legal situations that require a detailed valuation, among them: when considering a merger or acquisition; when seeking investment capital; when buying out a partner or implementing an employee stock ownership plan. A properly determined valuation inevitably enters into less pleasant activities such as shareholder disputes and divorce settlements. Tax minimization planning can involve business value, for example in developing estate and gift transfers.

A valuation can also indicate how your business compares to its direct competitors. It can identify the strengths and weaknesses of your business. When a valuation identifies weaknesses, it can help you focus on building long term value into your business. This will improve your outlook in terms of succession and estate planning.

With this many potential situations requiring a business valuation it’s important to have an up-to-date professional estimate of the real value of your business. To get a valid and commercially useful valuation you will need to work closely with a professional who has experience in the area. Your accountant already has a good understanding of your business and will be able to advise you on which valuation method will be best suited to your business circumstances.

Information for this article is sourced from RAN ONE.

Categories : Business Strategy
Tags : Business Planning, Business Strategy, Business Valuation

Keeping Your Business On The Right Track

Posted by Linnea Blair on
 07/05/2006

A business plan is a roadmap that sets out your route for the development of your business. It doesn’t tell you just about the current state of the business, its strengths and its weaknesses, it will also show up the opportunities and what needs to be done to stay ahead of the competition.

You might think you know all this now and don’t have to write it down. But what if something happened to you and someone else had to take over the operation? What would they need to know so it was still there and profitable when you returned? This is the kind of information contained in your business plan and its good insurance against the unknown.

It clarifies your objectives What are your goals? These will be in your business plan, the original goals you had plus any additional objectives that arise in the course of business. Your business plan spells out the goals and shows the milestones along the way that tell you how close you are to achieving them. Goals are flexible and can be as varied as achieving a certain level of turnover or simply acquiring new customers. It’s important, however, that each is presented in the same way as a target with milestones or indicators that will let you measure how near you are to achieving it.

It contains your business vision A vision is your description of how the business will look at a specific date usually three or five years from the time the statement is written. This is another part of a business plan that is regularly updated and describes how the business will look from the outside (to customers) and from the inside (to management and staff) when it has achieved the goals that are presently set.

It outlines your company’s mission statement The mission statement is another expression of the businesses’ long term goals. The mission of all businesses is to conduct profitable business of course, but it should also have other intangible goals covering such issues as morality and ethics. How do you want your business to treat its customers? How does your business want to treat its team members? The mission statement is both long term and ongoing – a statement of principles of business conduct and behavior that rests above the metrics of commerce.

Cover all the management essentials Businesses are organic in nature, changing constantly but always with growth in mind. Your business plan is also organic – an ongoing record of the changes in your business as well as a structure for the changes that will take place in the future and their intended consequences. Here are just a few of the many possible elements that can be incorporated into your business plan:

  • Your products – The present and planned range of products you sell, together with any product development your firm undertakes to create its own products
  • Your management structure – A statement of positions, responsibilities and authorities
  • Your finances – How the business is funded and how it will repay its loans, your company’s credit policy and how it will be enforced
  • Your marketing plan – How your business will be marketed, the promotional budget, the target market, future plans for expansion, and
  • Your succession plan – When you intend to leave the business and how you will realize its maximum value

Every business should have an up-to-date and functional business plan. It will tell you where the business is going and how it’s going to get there. It will focus the efforts of you, your management and the rest of your team on the drivers that will bring you what you want from the business. It is, in other words, a map to the future of your enterprise.

Information in this article is sourced from RAN ONE, Inc

Categories : Business Strategy
Tags : Business Plan, Business Strategy
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