Driving Business Value

Helping owners understand the strengths and weaknesses of their businesses can provide a blueprint for increasing value.

Private Wealth

By Grover Rutter - 10/3/2008

As business owners approach retirement, many begin to realize that they know very little about the value of the asset into which they have invested significant money, time, sweat and tears. ... In short, a seller’s perception of business value ... is [not] based on the marketplace’s perceptions [but] the seller’s idea of phantom value. Fortunately, huge value enhancement opportunities exist for business owners ... and the implementation of timely strategies can replace “phantom” business value with real and bankable wealth.

Managing The Client ... I’ve found that most business owners have one of three common mind-sets when it comes to their understanding (or misunderstanding) of business valuation issues, as discussed in the [first] chart [below].

... A variety of things can impact the actual or perceived value of a business... Fortunately, there are ways for a business owner to increase the value and at the same time manage risks ... An understanding of these issues ... will help advisors better prepare their clients for the valuation, and, ideally, for a highly profitable transaction.

Value Drivers Informed buyers will engage in a thorough due diligence process designed to find both the assets and the risks in a business. ... When business owners know what characteristics about the business offer value and how to improve on these advantages, it strengthens the overall performance of a business and can result in a better price at the point of sale. You should work with your business owner clients to ... substantiate these “value drivers” and, when possible, position them so they can be transferred to a buyer.

The [second] chart [below] discusses some common value drivers and how they can be developed more fully.

Value Detractors Risks, or problems, can detract from the value of a business in many ways. ... [Potential] buyers will respond to high perceived risk by decreasing their offering price. ...[When] risks are eliminated or mitigated it can increase the price of a business. ...

The [third] chart [below] includes potential risks facing a business and some questions to determine if the situation can be improved or requires attention.

... Furthermore, an owner’s personal style and stated goals can heavily influence how the opportunities and issues identified during the valuation planning process are handled. ... More information and educational tools on business valuation is available through The National Association of Certified Valuation Analysts at www.NACVA.com.

Grover Rutter, CPA/ABV, CVA, BVA, is a partner in the firm of Grover Rutter Mergers, Acquisitions and Valuation in Findlay, Ohio, which specializes in valuing and selling middle-market companies. With more than 30 years of experience in accounting, taxation, valuation and business sale transaction experience, Mr. Rutter is the author of numerous articles and books, and a frequent speaker at industry events.