Of course family business owners want their firm to be valuable – to their family, their clients, and the community. The possibility of selling the business typically forces the owner’s hand in pinpointing its value, but it makes sense to think about this now and periodically thereafter no matter what direction your family business is headed. What specifically does the business value consist of, how is it identified, and how can value be increased?
What makes a firm valuable? Some obvious measures of value in a family business include its assets, profitability, work backlog and client list. Digging a little deeper, value can be found in well-trained management with a strategic plan, positive ties to the community, and other less purely financial measurements. One approach to determine the areas of value in a family business, and therefore how to find areas of improvement, is to have an objective business valuation performed.
How business valuation works. It’s difficult to measure an improvement in value in the family business without knowing the pre-improvement value. A business valuation can be performed to identify the fair value of the firm, often identifying specific areas of improvement that could be made to increase the overall value. Cash flow, forecasted earnings, comparison to competition in the market, and analyzing the net assets (e.g., real estate, machinery) are all areas that are considered when measuring value. Details of these methodologies may be found in this previous post; a professional family business advisor can provide this assistance.
Business valuations aren’t just for selling the family business. As indicated earlier, the sale of the family business isn’t the only reason its value should be known. An unplanned sale, whether due to the untimely departure of the owner or otherwise, may be forced upon the family and any opportunity to improve the value would be lost. The business succession plan generally works best with a known valuation in order to plan for retirement, etc. Obtaining financing for building expansion and other growth needs could require a valuation, and the discovery of any problems later in the process could delay approval. A divorce or other separation of a family member from the business may affect financial agreements in place, thus prompting the need for a review of the firm’s value.
Raising the value in defined areas of the family business. An obvious area to increase value is by maximizing profits. By definition, a business is intended to make a profit, although this isn’t always the case. Know the market and your competition and its pricing, review your financial statements to ensure profitable operations, and have strategic plans in place to allow for change. While increased profits help your family immediately, they also boost the value of the business in a future sale and could enhance the ability to receive financing. As for strategic plans, putting the thought into the future direction of the firm shows long-term focus and therefore increases value. A succession plan adds similar value by outlining the transition of power when the time comes. Training the next generation of leaders and preparing the employees and clients for the direction of the family business makes the firm more attractive and valuable whether it is poised for sale or not.
A baseline business valuation may help identify obsolete or slow moving inventory, or machinery that isn’t productive but regardless, has value. A strategic sale limited to the unneeded assets may free up cash to invest in other areas of the business, while also freeing up warehouse space. A review of financial statements during the business valuation could indicate an overinvestment of business capital, resulting in lost opportunities that the capital could have been used for. For example, the practice of letting long-term customers pay invoices consistently late or paying vendors before due dates without receiving a discount carries a cost to the family business. Just like overpaying taxes and getting a refund in the next year essentially gives the government an interest-free loan, being too quick to pay and too slow to collect, means less money for the business.
Value may even be found in the lack of issues – knowing that the family business is running efficiently provides peace of mind. But no matter the case, having a baseline valuation and working on all of your family business planning can increase value in many areas. We work with your family business to identify your best strategies for increasing value.
Contact me at email@example.com or 732.747.0500 with questions or to receive a complimentary consultation about business valuation with our family business advisors.