Family-run businesses that rely on succession planning to maintain and augment wealth into perpetuity typically require business valuations on an annual or biannual basis. Tracking the various value points over generations provides critical insight into the past and present. It also allows industry leaders to make informed decisions about future business strategies.
A business valuation includes a thorough analysis of the organization’s management structure, capital investments, and projected future earnings, among other things. It also lets ownership and next generation leaders know the fair market value of the organization’s assets. Business valuations should be conducted every 12 months, at minimum, to best identify market competition, asset values, and income values.
As insightful as arguments for regular valuations may be, too many enterprises consider the business valuation process as a passive activity. By taking a more proactive approach, family-owned and operated businesses can plan more effectively for the future of the organization.
What Does Historical Data Indicate?
The average company looks back 3-5 years to understand its financial trajectory. That’s largely because many businesses, both publicly and privately held, rely on hiring experienced CEOs to steer the ship. These business professionals often retire or take other positions and are quickly replaced. Those organizations may also get bought, sold, or undergo radical transformations. Stability proves to be a relative concept with such upheaval.
Family-owned operations, by contrast, usually enjoy steady leadership from like-minded people. Their financial data can be linked to known leadership philosophies, trends, economic factors, and priorities. Looking back over decades of data and understanding a specific period’s initiatives paints a more comprehensive picture. A business valuation can be leveraged as a living legacy that supports forward-thinking strategies.
Does Your Organization Suffer From Customer Dependence?
Part of a proactive business valuation involves putting the overall customer base under a microscope. Consider a hypothetical situation in which 80-90 percent of the company’s revenue comes from less than 10 percent of the customers. Now consider that newly minted trade deals or cost-effective outsourcing practices allow a competitor to undercut your product or service. In another scenario, imagine if those customers suffer a devastating cybersecurity breach and get sidelined. It’s easy to see where this is going.
A diligent business valuation provides the information decision-makers need to identify potential weaknesses in the operation’s financial footprint and secure them. While long-standing customers may make profitability easy, the organization might be wise to diversify or develop new revenue streams.
Next Generation Leaders Can Use Valuations as a Historical Bridge
A lengthy history of business valuations provides future leaders with a roadmap. Next generation leaders or internal promotions come to the table with ideas about their generation. But a record of thorough business valuations reads like a historical novel, and they write the next chapter based on the previous ones. Markets, products, and services will evolve. But your organization will not have to repeat past mistakes due to lack of information.
Does Your Succession Plan Ensure Steady Leadership?
Some companies rely on visible leaders to drive interest and revenue. We all see those organizations whose CEOs capture the public’s imagination. Some of these corporations see volatile spikes and dips in their values. While this may seem tantalizing to investors, business valuations can fall off the cliff when charismatic leaders exit.
Savvy succession planning leverages data such as business valuations to identify the next leadership team candidates. It’s in a family-owned enterprise’s best interest to ensure a steady hand guides the organization throughout the years. Business valuations can be proactively used as a teaching tool that offers the next CEO and CFO a rare perspective about the next steps.
It’s in an organization’s best interest to have regular analysis conducted by certified professionals. While impartial due diligence remains the first step to developing a legacy of essential data, organizations would be well-served to utilize business valuations as a proactive asset that drives long-term decisions. The advisors at Prometis Partners can help you increase the value of your business through an in-depth analysis of your business valuation. Contact us today to learn more about how we can help you.