The opinions expressed by Entrepreneur contributors are their very own.
Determining the worth of an organization isn’t nearly adding revenue and subtracting expenses. While these hard numbers are a very important part, they’re only half the equation for calculating company value. To determine true value, we also consider aspects resembling the extent of ownership involvement, company goals, and growth opportunities. Using the total equation gives us a comprehensive picture of an organization and helps us higher understand its past, present, and future.
The calculations may vary depending on the business, but in a healthy business there may be a few 50/50 split between the quantitative (financial) and qualitative (non-financial) sides of performance. If the business isn’t profitable, it’s more necessary to concentrate on the quantitative side and fix the numbers first. Many owners don’t need to listen to this, but when they don’t seem to be hitting their numbers, it could mean the business is not working. They must fix the quantitative problems before moving on to the qualitative side.
Related: What is a balance sheet and why does your corporation need one?
For healthy firms that need to maximize their value, the qualitative indicators will be bundled into three foremost categories.
Evaluate quality
1. The owner’s objectives
We have found extensive research showing that an owner who has defined goals and plans for the long run which might be consistent with market expectations for the worth of their business can have a significantly better exit. What is the owner’s defined goal for exiting the business – to get as much money as possible, handle their employees, and secure a legacy? You then must determine the “why” behind the goals and develop an motion plan. The answers to the questions almost don’t matter; having achievable goals and a technique to attain them can increase the worth of the business since it allows the owner to concentrate on improving the opposite areas of the business.
2. The role of the owner
The level of owner involvement is an important indicator, but perhaps not for the explanation you think that. The more involved the owner is within the day-to-day operations, the more central he’s to the corporate, the fewer the corporate shall be invaluable in the long run. If the owner is the linchpin that holds every part together, what happens to the corporate when he leaves? Evaluating operations is more concerning the system and structure of the team. Look on the organizational chart and who’s on it – are they good or bad employees? Examine the corporate’s processes and procedures and the way recent team members are trained and onboarded. The owner sets the vision, however it is the team that drives company value by executing the vision.
3. Growth opportunities
Nobody desires to buy a business and leave it exactly because it is. They need to see growth potential for the long run, especially the potential for a return on their investment as a buyer. Whether it’s an easy price increase or recent locations, whoever is buying the business shall be asking about growth opportunities. Indicators resembling services or products diversification in each the corporate and the industry it operates in provide indication of whether the corporate is making progress or stagnating (and in peril of going backwards). The more potential you may reveal, the more advantages there shall be for the subsequent owner – and that can result in greater value.
Related: 8 aspects that determine the financial health of an organization
Cycle of success
When the standard side of the equation works, every part falls into place. The owner knows the goals that align with the direction of the corporate and runs the corporate but works his way out of the day-to-day operations; the corporate grows and creates more growth opportunities for the subsequent owner. Paired with profitable numbers, this can be a cycle that builds a top quality company.
The best owners need not less than three to 5 years to get this cycle working and to have reliable indicators of their value. Better yet, incorporate it right into a 10-year strategy.
At Exit Factor, we use 62 different qualitative indicators to find out company value. We don’t use all of them, and even near all of them, for each company. Typically, three to 5 of the 62 indicators must be adjusted. Find out which of those 62 indicators are necessary in your company and you’ll need a very forward-looking strategy for profitable growth.
