Business valuation has traditionally been used to support a business selling price, resolve a legal dispute, raise additional capital and other situations. What is common to all these scenarios is that business valuation is used as part of the established business strategy: business people know what they want to do and need to determine business value to support their objectives.
Increasingly, business valuation is becoming an essential part of business strategy. Instead of getting a numerical answer, business owners want to know what drives business value and what they can do to increase it in order to meet long term goals.
This turns the conventional business valuation on its head. Instead of getting a number to justify your expectations, you look for insights that can help you develop a plan to meet your financial objectives.
How can business valuation help here? In short, by identifying key value drivers in your business and then seeing how a number of well designed changes can significantly increase the value of the business going forward.
A number of business valuation methods exist that can help you in this regard. Consider the multiple of discretionary earnings technique. Here the business is valued based on its earnings and a set of 14 value factors that you assess.
The power of the method is that it enables you to translate these value factors into a numerical answer. How does the presence of an experienced management team affect what the business is worth? What if you reduced customer concentration, or lowered employee turnover? Will adding another product or service help smooth out the business earnings over time?
The multiple of discretionary earnings method helps you to quickly construct any number of valuation scenarios with different value factor selections. The resulting business value that you calculate shows you which of the potential initiatives has the biggest bang for the buck. Armed with this information, you can proceed to develop an action plan that gets to your target business value.