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Determining a company’s value is not just about adding revenue and subtracting expenses. While these numbers are important, they are only half of the equation. To arrive at true value, factors such as owner involvement, company goals, and growth opportunities are also considered. The complete equation provides a holistic view of a company, providing a deeper understanding of its past, present, and future story.
While calculation methods vary from company to company, healthy companies have a roughly 50/50 split between quantitative (financial) and qualitative (non-financial) aspects of performance. If your business is not making a profit, it’s important to focus on the quantitative aspects and fix the numbers first. Many business owners don’t want to hear it, but not hitting your numbers means your business is not doing well. You need to solve the quantitative issues before you move on to the qualitative aspects.
Related: What is a balance sheet and why does a business need one?
For healthy businesses looking to maximize value, qualitative metrics can be summarized into three main categories:
Quality assessment
1. Owner’s goals
Key findings show that exits are much stronger if the owners have clearly defined goals and plans for the future that align with market expectations for the value of the company. What are the owners’ clearly defined goals for exiting the company? Is it to make maximum profits, take care of employees, and leave a legacy? Then you need to determine the “why” behind the goals and devise a plan of action. It hardly matters what the answer to the question is; having achievable goals and a strategy to achieve them will increase the value of the company as the owners can focus on improving other areas of the business.
2. The Owner’s Role
Owner involvement is an important metric, but perhaps not for the reasons you might think. The more involved the owner is in the day-to-day running of the business, the more central they become to the business. few It is up to the owner to make sure the business remains valuable in the future. If the owner is the linchpin that holds everything together, what will happen to the company after the owner is gone? Evaluating your operations is about systems and team structure. Look at the organizational chart and see who is there. Are they good or bad employees? Examine the company’s processes and procedures, how new team members are trained and onboarded. The owner sets the vision, but it is the team that makes the company valuable by executing the vision.
3. Opportunities for growth
No one wants to just buy a company and leave it at that. You want to see the potential for future growth, especially the potential for a return on your investment as a buyer. Everyone who buys a company asks about growth opportunities, whether that’s a simple price increase or opening new locations. Metrics like diversification of products and services, both in the company and its industry, are a good indicator of whether a company is moving forward or stagnating (at risk of regressing). The more potential you can show, the more upside it will have for the next owner, leading to greater value.
Related: Eight factors that determine a company’s financial health
Cycle of success
When the quality aspects work well, it all ties together. The owner knows a goal that aligns with the company’s direction, and they work away from the day-to-day operations while still leading the organization. The business grows, creating even more growth opportunities for the next owner. Combine that with profitable numbers, and you have a cycle of building a quality business.
For any good owner, it takes at least 3-5 years to get that cycle working and get a reliable indication of value. Even better, make it part of a 10-year strategy.
At Exit Factor, we use 62 different qualitative metrics to determine company value. We don’t use all, or even nearly all, for every company; we typically only tweak 3-5 of the 62 metrics. By identifying which of the 62 metrics are important to your company, you can develop a truly forward-looking strategy for profitable growth.