If you were leading a publicly held company, your ultimate job responsibility would be to create value for the stockholders. Run an innovative, efficient, fiscally responsible, customer-service driven company with a strong brand identity, on a consistent manageable growth track, and the stockholders love you – and you get to keep your job. Wow, in one big sentence I just encapsulated the primary objective of a successful CEO who reports to the Board of Directors that represent the stockholders. At the end of the day, business and leadership is about growing the value of the company.
This whole concept of creating company value becomes a blur when you’re the owner, leader and primary stockholder. You’re doing work that you’re passionate about while pushing to grow sales, keep people productive, pay the bills, solve problems and generally keep things heading in the right direction. Yes, all your hard work has a direct impact on creating value for your company – but you probably have no idea what it’s worth.
Here are some no-compromise leadership thoughts on how knowing your company’s value can dramatically improve the way you play the business game:
- At the end of the rainbow: According to Bloomberg Businessweek, fewer than 25% of business owners know what their companies are worth. That means that most entrepreneurs are hoping the business gods have that pot of gold waiting for them when it’s time to sell or retire. I receive calls all the time that sound like, “I’m thinking of getting out in three to five years and want to know what my business is worth.” That’s the right question being asked 30 years too late.
- A really bad guess: There are simple valuation multipliers like 1 to 2 times revenues or 3 to 4 times earnings, but these formulas are like using a shotgun for target practice where some pellets hit the target just because it was in the way. The fact is, most owners are so emotionally attached to their companies that they guess way too high. They think because it’s doing $1 million in sales, it should sell for $1 million to $1.5 million. If a whole bunch of key factors line up perfectly, it just may sell for that much. However, all it takes to rapidly chop that number down are things like a bad lease, bad economy, worn-out equipment, excessive debt, a history of losses, or an owner who generates the bulk of the revenues. Betting your exit strategy on a really bad guess usually turns into a sobering wake-up call.
- Business physicals: If you go for an annual physical to ensure that you’re healthy, why not get your business appraised every two to five years to make sure it’s healthy? Professional appraisers charge between $3,500 and $5,000. The fee will vary based on the size and complexity of your company. Appraisers have their own national associations, such as the American Society of Appraisers (appraisers.org), the Institute of Business Appraisers (go-iba.org), and the National Association of Certified Valuation Analysts (nacva.com). Their sites can help you find an appraiser. There are also business brokers who will appraise your company with the goal of selling it; find one through the International Business Brokers Association (ibba.org).
- Power of knowing: If you’re going to sell your home, you want to do everything you can to maximize its curb appeal by painting, landscaping, polishing things up and buying new appliances. It’s very much the same in business. Once you go through the appraisal process and know the value of your company, you’ll know where its weak points are. You may need to focus on making your balance sheet look healthier by clearing up debt. The same goes for your profit-and-loss statement. Other factors might be operational systems that need refining or reinventing, or physical space that needs a facelift. Or, as is often the case, you may need to make yourself less of a factor in the success of the company by not being the primary revenue generator. There is power in knowing.
- It’s an asset: It’s fine to be passionate and emotionally engaged in your company and your work. But as I always remind entrepreneurs, you are not your company. Your company is a separate legal entity. If you are the sole or primary stockholder, it is an asset you grow in value through your leadership, vision and determination. Maintaining that separation between you and your company helps you to remain objective and allows you to make better, less emotional, decisions.
Buy your business an appraisal every three to five years to see what it’s truly worth. It’s what no-compromise leaders do.
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