As a business owner, it is key to understand how valuations work. One of the biggest concepts that you can get a hold of is company-specific risk.
If we’re talking about a huge publicly traded company, like Textron Aviation, in Wichita, we would expect that company to grow 10% per year. But much smaller and closely-held businesses who don’t have departments upon departments that could manage the risk of the company and run the company well would need an expected growth rate of 20, 25, or even 40 percent per year to maintain a high value. 60% of a company’s value is directly attributed to how risky it is, meaning that riskier companies need high growth and cash flow to balance out their high risk.
The valuation of a company matters to the business owner, such as yourself, when you want to sell it, exit out, create a succession plan, create a buy/sell agreement, or even start an employee stock ownership plan. Your valuation hinges very, very heavily not just on your cash flow, but on your level of risk.
The relationship to keep in mind is risk and reward. If your company is really high on the risk scale, your value is gonna be lower. If your company is really low on the risk scale, your value will be significantly higher. Risk is what we have to assess to come up with an appropriate discount rate of your future cash flows. Ultimately, that’s the number of what your company is worth. Very fundamentally, whatever your company can produce in future cash flows given its level of risk is what your company is worth. This is huge.
A second valuation process we do is the Value Opportunity Profile, which we put together after assessing the departmental risk of your company. We look at the financials of your company and put together this profile that shows your company’s worth as it is today. The goal is to bring the different departmental risks, or core business competencies, into alignment with one another so that you don’t have a sales force that sells more than what you can produce or an HR department that can’t keep up with people and procedures. There are so many different ways that a company can go under when it’s not growing in a balanced way, and that’s what makes this valuation tool useful. Once your company is balanced and operating better, it's going to naturally produce more. Your areas of competence are now matched by the areas that you weren’t so good at, and things tend to work better.
Still, company specific risk is the single most key factor in growing the value of your company. We can help identify your growth areas and help you overcome them, so schedule a call today to get started.