A business valuation, as mentioned in our previous blog, is the process that we use to determine the economic value of an organization. For the most part, business owners don’t get them done until just before selling off their business. However, I would recommend that owners consider performing a valuation at least 3 to 4 years before they even think about selling. In this second part of our five part series on the subject, I’ll cover the first main reason to get a business valuation early; it provides an evaluation of the business as it currently stands. We get to see where the value of the business is currently concentrated.
A current valuation provides owners with an opportunity to stop and look at their organizations critically. Most often than not, we as humans are so preoccupied with what lies ahead that we forgot to stop and look where we’ve been and what we’ve done. Business owners and managers are especially guilty of this as they are always too busy trying to look forward, stay relevant, and move ahead of the competition.
Stopping to look at your organization is important because it allows you to evaluate the strengths and weaknesses of the business as it currently stands. While this can be done by simply doing a SWOT analysis, the added detail of a valuation allows management to make better and more informed decisions. It allows them to gain some perspective on the different roles and aspects of the business itself. This in turn, provides insight as to where value can be added in the future.
Let’s take a look at a hypothetical situation using Mr. & Mrs. Garcia’s storage and distribution warehouse.
Mr. & Mrs. Garcia own a warehouse that is located close to a major interstate highway and have been running it for 10 years. They handle most of the staffing required; a group of guards, a couple maintenance crew members and the crew needed to move the inventory. 10 trucks can be loaded at a time, however, there are currently two adjacent storage areas not being used. The building is only about 12 years-old and the maintenance crew has autonomy make repairs as needed.
After performing an business valuation, Mr. & Mrs. Garcia are dismayed to find that their business isn’t worth quite as much as they think it should be. With the valuation, they begin to look critically at their business and they find the following:
- Since they are always on site, their maintenance crew works quickly and the guards provide protection of the inventory.
- The size of the inside of the warehouse is large enough to accommodate their clients.
- While there is enough land and concrete surrounding the building, there are no procedures in place for trucks coming in and going out and where to load or unload - a free-for-all. This leads to a lot of wasted time in an industry where timing is everything.
- Two of the storage areas are sitting empty and are literally wasted floor space.
- The warehouse is one large open room and there is no cold storage thus limiting what can be stored on-site.
With the current valuation, the Garcias’ see where their business currently stands and can use that information as a valuable tool. With it, they now have a detailed view of the sectors where the company can use the most attention. The Garcias’ will now use this valuation and snapshot of the company as a lens through which to focus their future efforts and create a more focused company goal set.
This brings us to the next benefit; more precise future planning. What can the Garcia’s do to grow the value of their business and have it run more efficiently? We’ll cover this in more detail in next week's post.
If you’d rather not wait and want to go over valuing your business as well as other future long-term strategies such as Intellectual Property protection, Process & Procedures refinement, and Estate Planning, then please don’t hesitate to connect with us here and schedule a free consultation.
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