There could be some areas of the business doing well and other areas doing less so. A value analysis as to why this is happening needs to be carried out. Could it be that the business areas performing well are in promising industries while the other business areas are in a declining industry where valuations are at an all-time low and unlikely to rebound? Sometimes family business owners get engulfed in using the bulk of their time trying to fix the struggling business area as opposed to concentrating their energies into further developing and strengthening areas of success.
The reality is that most owners of SMEs and family businesses operate from day to day with no clear understanding of their value. That’s because busy executives often assume there is no easy way for them to determine value and simply put the subject aside. Many SME and family business leaders see third-party valuations as complicated, time consuming, intrusive and expensive. Thus, they undergo them only when they must — for example, when seeking capital for growth.
Despite these challenges, if you own or manage an SME or family business it’s imperative that you conduct a detailed valuation on a regular basis. At least once a year. Think of it in the same way as when you go to your doctor, to do your routine health check up — an essential step to find out what is going right, and more importantly, what may be going wrong. Then, you can take corrective action before it’s too late.
Besides reviewing past financial statements, all aspects making up the business need to be looked at. The internal business structure, the internal business governance, the internal capability for strategy formulation. A 360 degree external view of the market the business is involved in needs to be scrutinised , the type and amount of competitors, the opportunities and threats in such a market. In other words the family business needs to proceed to link a SWOT analysis to the business valuation.
Thus, an approach to a valuation exercise emphasises a close analysis of your any business’s most important value drivers and those characteristics that make a business unique – be it the quality of leadership to pricing power to brand equity. A thorough and honest appraisal of these value drivers is essential to calculating a company’s value.
All the above data can then be used to base future forecasts on all this information. Avoid selling your business at a discount to its true value. Once the true value is reached this then will better enable the following ;
- Better focus on how to improve the family business by enhancing value drivers.
- Create a strategic plan that has value creation as the centerpiece.
- Incentivise staff based on the value they create rather than using revenue.
Having an exact value of the family business is a necessary strategic planning tool and not a one-off event when raising capital or when selling the business.
(All factual and statistical information presented in this blog has been obtained from an extract of a blog from silvansbusinessinsights.com ) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt
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