What is business value?

Who values and what is valued...

The value of a business depends on the relationship of the valuer to the business. A purchaser will value the business differently from a business owner. A shareholder, or for a publicly traded company, a securities market, will value it differently from a CPA. A prospective investor will have one value while an owner has another.  One of the challenges of creating value growth is deciding on the purpose of the valuation and the growth strategy appropriate to achieve that value.

Purchase Value

One of the main criteria that investors consider when evaluating a prospect is the intention of the company management regarding end game for the stage which the investor is funding.  Institutional investors consider company growth to consist of a series of investor involvements, seed capital; angel investors; venture capital rounds A, B, C, etc.; mezzanine financing, initial public offering.  For any investor, the current value of a company is a function of the expected value at the time the investor chooses to exit.

For those companies seeking greatest current growth capital at the least loss of control, the business growth plan should emphasize a maximum exit value for the then owners.   There are two pools of financial value: assets, tangible (plant, property, equipment, etc.) and intangible assets (patents, knowledge, methods, etc.); and the present and future flow of earnings.  The value of assets also depends on whether the investor or purchaser intends to maintain the company as an ongoing concern.  If not, asset value reverts to market value for each individual asset.

 

Value to the Customers

A third constituency that has a view of company value is that of your customers.  How do they value your company compared to different companies in the same market space and in other market spaces?  Can we measure this value by market share, product sales, net revenue, brand value, or some other measure?  How much does customer loyalty play into the overall value?

By any measure the company with higher customer loyalty will be more valuable than one with lower everything else being equal.  Also, a stronger brand presents better value than a weaker.  When it comes to monetizing the value that customers place on your company and your products, what is the target result and how do we arrive at it?

Ongoing Concern Value

A company's ability to generate consistently high profitability, whether measured in equity price increases or earnings payouts to owners, determines its overall value as an ongoing concern.  This view of company value is especially germane for existing stakeholders: shareholders, owners, employees, community.  In this case growth strategies generally suggest producing more, increasing service, selling more, expanding markets; but also becoming more efficient, cutting costs, and adding value to process and product.

Growing a business should result in increasing the business' value.  The particular growth strategy (vector) depends on the perspectives at which we aim; owner, investor, customer, community, stakeholder, shareholder, or some combination.  It also should depend on the use of the business growth drivers which are most effective for a particular company.