How did your firm perform financially in 2022? As the books close, most will look immediately to the bottom line for how much profit or cash flow was generated. It is always good to have positive cash flow, but is that the best way to track progress as a firm owner? Success can be tracked by many different Key Performance Indicators (KPIs) or measures. When consulting with firms, we recommend using KPIs critical to the health of your business. The one measurement that there is no substitute for—and that overarches all others—is your firm’s value.
There are many reasons for determining the firm’s value:
- Benchmarking your growth and initiatives
- Accountability for ownership and management
- Business and succession planning
- Accurate personal net-worth statements (for all sorts of borrowing)
- Annual bank loan requirements (most large loans require this)
- Potential addition of a minority partner(s) or an investor
- Insurance purposes (i.e., key man insurance)
- Estate planning
We believe the most important reason is using the value as the critical benchmark and reference point. Taking the liberty of altering an old adage, “If you do not know what the value of your firm was, or is now, how can you know where you are going, or how you are going to get there?” Knowing the value of your firm is the key component of creating your succession plan and exit strategy, which are must-haves for a well-run business.
For many, your company may be your largest single asset. Although profit generated is obviously important, growth in value of your company is the single most important indicator of success. Without consistent valuations, how can you determine if your business plan was effective? A valuation will show if your time was spent wisely, if new initiatives worked, or if investments made were beneficial, or even accretive.
Reviewing your bottom line is important, but financial statements rarely reflect the true earnings of the company. Finding your firm’s value is not as easy as looking at your profit and multiplying it by the mysterious “market multiple.” In the hundreds of valuations we have performed, each one required different—but similar—adjustments to normalize the earnings.
Valuations review the financials as if a third-party owned and managed the company, not yourselves. As examples, an adjustment might be made to increase the expenses if the owner has not taken compensation for managing the company; profit is increased; or if the owner has distributed excess compensation over the market comparison. There are literally dozens of potential adjustments we make regularly.
Valuations can be performed internally, but we recommend getting at least your first one done professionally to better understand the process. Professional valuations are not a large expense, but will yield returns many times over.
For more information, please visit https://www.WAVGroup.com.