You might consider strategic planning and exit planning as two different things but Jennifer Murray, vice president of McFarlin Stanford, leader of their valuation and financial advisory practices, argues they are one and the same.
“Having a proactive forward-looking value creation mindset I think is additive to any business, whether you’re just starting out, or whether you’re contemplating exiting your business in the next three to five years,” she says.
Whether you are creating a strategic plan or an exit plan, the first step for both should be conducting a valuation.
“What you can do with the information directly affects that final dollar figure getting exponentially bigger, depending on when you get into the game of trying to answer those questions,” says Chris Psencik, partner and vice president of McFarlin Standford, leader of their construction operations and sales coaching practices.
What Goes Into a Valuation
It’s easy to think your company’s revenue or bottom line profits is how much your business is worth, but the only way to truly know how much it is worth is to conduct a valuation. Similar to how houses are priced, a lot of valuations are based on what others have paid for comparable companies in the same area.
During this process, the appraiser will drill down on the specifics of the business and see if there are distinguishing factors that can push the value of your company higher or lower than average.
Like how a house with a pool increases its value, some factors can make your company more desirable than others. Some of these distinguishing elements include the diversity of your customer base, having multiple revenue streams from the same customer, and a good maintenance base, not just installation.
“It’s good to think about layering in perhaps complementary business lines or different types of customers so that you’re not overly reliant on one source of revenue, or one or two large clients,” Murray says. “Those can have big impacts on value.”
Some valuations are based on multiples of cash flow or multiples of revenue. They can also look at the liquidation value of equipment and accounts receivable. Murray says she tries to do a forward-looking cash flow valuation of if the company keeps growing for the next three to five years at the same rate this what they will be worth in the future.
Murray advises getting an independent third-party valuation of the company. Unlike brokers, who get paid on the sale of the business, a third party has no incentive to provide a number that is higher than your business might actually sell for.
Boosting the Value of Your Company
You can maximize the value of your business by creating a three- to five-year plan with key metrics you want to reach. Break down the goal from where you are now to where you want to be in five years into bite-sized increments.
Murray encourages all business owners to undertake this type of exercise of planning as having a multi-year vision is worthwhile. She says owners should be doing a valuation every couple of years as part of their normal health and maintenance routine.
“I encourage people not to be afraid of the process,” Murray says. “I think there’s maybe a perception that a valuation is going to be a lot like going to the dentist extremely painful, extremely time consuming and frankly, extremely expensive.”
Keeping a good set of books and having a good sense of your customer base and what that looks like from a business mix perspective, and an up-to-date organizational chart are some of the basic elements to have on hand for a valuation.
“If you can provide those things and be available for a 45 minute to an hour call, you’re going to get some pretty good information in a relatively short time period that helps you manage for the next two to four years,” Murray says.
Some people don’t undertake the exercise of strategic planning due to uncertainty about the near future. However, Murray says the important thing is to instill the discipline of going through the exercise and making an attempt at a strategic plan.
The future will never play out the way we plan it to, but when things go off the rails she says it’s easier to recalibrate based on the plan you had versus being completely at a loss.
“Just because you have some uncertainty in the next three to five years doesn’t mean that you shouldn’t try to undertake this exercise anyway,” Murray says.
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