Structure & Procedure Changes - Business Valuation Part 4

Early business valuations bring many benefits for business owners and managers. We have already covered the benefits of An Evaluation of the Business as it Currently Stands and Precise Future Planning. This week, we’ll cover the advantages a valuation brings in times of Structure and Procedure changes. Valuations can provide concrete answers when it comes time for ownership changes and can increase after the implementation of process and procedure enhancements.

Again, we go back to Mr. and Mrs. Garcia’s storage and distribution warehouse as our example.

Mr. & Mrs. Garcia are not the only owners of the business. In fact, Mrs. Garcia’s brother-in-law had provided some of the initial capital investment in the building and business itself. The Garcia’s would like to buy out his stake in the business before they go about implementing their processes and procedures enhancements. Using their current business valuation, they are able to determine a dollar amount as to what the In-law’s ownership stake is worth and have the valuation as evidence. Here, the valuation helped the Garcia’s streamline their business and buy out the other owner. The same principle applies not only to the dissolution of a partnership (when a partner wants out), but also to instances of selling off part of the business, a looming divorce and to help mitigate conflict.

Now that the Garcia’s are the sole owners of the business, it is time to implement their operations improvements that they planned during their future planning. First, they start with the easier tasks of adding signs that direct traffic throughout the lot as well as designating loading and unloading zones for trucks. Next, they move on to installing more energy efficient lighting. They install large fans to cut down on the humidity of the warehouse, creating a better working environment. They also have an electrician do some work so that lighting of the warehouse can be segregated. Unused sections won’t have to be lit if nobody is working in them.

All of these enhancements are process and procedure improvements and can be classified as trade secrets therefore adding value to the business. In the future we’ll cover trade secrets in greater detail, but know this; Trade Secrets carry two properties that make them trade secrets. They:

  1. Have economic value to the business.
  2. Are protected by taking reasonable precautions.

Trade Secrets add value to an organization. In our case, the Garcia’s have made some enhancements to the processes and procedures of the business and have therefore, added value. This means that they are ready to have another business valuation done. It will show that their business has increased its value. This is very important when it comes to our final benefit: a smoother Mergers and Acquisitions (M&A) process, which we will cover next week.

If you’d like to go over how to identify and document your organization’s processes, procedures and trade secrets, as well as other future long-term strategies such as Intellectual Property protection, Debt & Equity Financing, and Estate Planning, then please don’t hesitate to connect with us here and schedule a free consultation.

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