Whether preparing for a sale, succession planning, or assessing strategic growth opportunities, private company owners need to grasp the intricacies of valuation. Unlike public companies, private businesses face unique challenges in assigning value, but they also have distinctive opportunities to enhance it.
Assessing Operations as the Foundation of Value
Public companies have the benefit of transparent market transactions, providing a clear indicator of their worth. Private companies, however, lack such ready benchmarks. Their value often hinges on a multiple applied to earnings—a simplified metric that may overlook significant variables. For private companies, achieving and sustaining a favorable valuation begins with a deep operational assessment.
While boosting earnings seems the obvious path to value creation, the reality is more nuanced. A company’s worth is equally influenced by its ability to secure a higher multiple—a factor tied closely to perceived investment risk.
Improving the Multiple Beyond Industry Averages
The multiple in a valuation equation represents the perceived risk associated with a specific company, not just the average risk of its industry. Applying an industry average indiscriminately can result in inaccurate valuations, underselling the business’s true worth.
To improve the multiple, company leaders must address operational and strategic risk. This begins with a robust, updated strategic plan. A well-crafted plan not only aligns the business with market opportunities but also signals to investors that the company is proactive, well-managed, and positioned for sustainable growth.
Key steps to improving the multiple include:
- Strengthening governance structures to demonstrate sound leadership.
- Optimizing operational efficiencies to reflect a resilient and scalable business model.
- Building a compelling narrative around the company’s market positioning and growth potential.
Reducing Risk and Increasing Value
Value is not solely tied to current performance metrics. It is also rooted in the perceived ability to sustain and grow earnings. This perception depends on mitigating risks across various dimensions:
- Leadership: Ensure leadership is well-equipped to navigate challenges and leverage opportunities. Strong leadership inspires confidence in a company’s resilience.
- Sales and Marketing: An organized, proactive sales strategy demonstrates the ability to capture and expand market share.
- Financial Management: Transparent and strategic financial management reduces uncertainty and underscores stability.
- Technology and Capital Investment: Up-to-date systems and capital assets signify a forward-looking approach to operational excellence.
By addressing weak points in these areas, private company owners reduce the overall risk profile, not only increasing the multiple but also ensuring sustainable growth.
Timing and Control in Preparing for Value Realization
Ultimately, the value of a private company materializes only when a transaction occurs. To maximize control over the valuation process, owners must act well before initiating a sale or other major event. Waiting until negotiations start places the power in the hands of potential buyers, who will seek to capitalize on any perceived shortcomings.
Taking proactive steps to refine operations, reduce risks, and enhance the multiple allows owners to secure a premium valuation. Additionally, these actions often lead to improved earnings, creating a compounding effect on overall value.
Unlocking Greater Value with Expert Guidance
Every private company has untapped potential to increase its value. However, realizing this potential requires a disciplined approach and expert guidance. At Meaden & Moore, we specialize in helping business owners achieve their financial and personal goals.
Download our comprehensive whitepaper on private company valuation to explore actionable strategies, tools, and insights that will position your business for success.