As a business owner, increasing your profitability is probably one of your highest priorities. But do you know that simply improving your profits may not also maximize the value of your organization? Many business owners assume that a more profitable business is a more valuable business. In many cases this may be true, but there are factors other than profitability that directly impact the market value of your business.

What drives organizational value?

Just as every business is unique, so are the areas that create or detract from organizational value. Your company’s current and future revenue, your profitability, your entity structure and tax status, technology, products, services, customer base, economic conditions and even your reliance on key personnel can all affect the market value of your business.

While many business owners associate business value only with specific events, such as a sale or divorce, great business owners focus on building value throughout the lifetime of their business. The key to increasing the value of your business lies in understanding, measuring and improving your key value drivers throughout the life of your business.

How can you understand the value of your business?

You’ve probably heard the phrase “what gets measured, gets improved.” This certainly holds true for creating value in a business. How do you measure the value of a business? A business valuation takes a look at the value of your business from the perspective of a potential buyer. A valuation will help you understand how each of these areas affects the marketability of your company, allowing you to take strategic steps to build value.

Periodic business valuations are a great idea when it comes to building value in your business. Armed with a business valuation, you and your advisor will be able to develop a strategic plan to maximize organizational value – focusing on both positive value drivers and areas that may have a negative impact on the value of your business.

When is business value most important?

While profitability is almost always important to a business, the value of your business is most important at the time of sale. A great business is a business that can continue to succeed and create value even after ownership is transferred. So as a business owner, if maximizing long-term value is important, you should always be focused on creating an organization that has maximum transferrable value.

Whether you have plans to sell your business in the near future or not, it is a great idea to be constantly preparing for the possibility of sale. If you wait to look at value until you are nearly ready to sell your business, you may miss out on significant opportunity.

What steps should you take to maximize the value of your business?

Maximizing organizational value requires understanding its relevance and making a conscious decision to focus on more than just profit and cash flow. You’ll want to start by sitting down with your CPA and have a serious discussion about the value of your business. Once you decide to focus on value, you and your advisor will be able to develop a plan to help you identify and improve the value of your company. Your advisor can help you identify key value drivers unique to your business. In many cases, a plan for periodic business valuation may also be recommended.

As a business owner, you really only have two options. You can focus solely on profitability and hope for the best, or you can intentionally drive up the value of your organization.

To learn more about how to measure and maximize the value of your business, call us today.

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