Permanent valuation, value creation and management-participation
A lot of entrepreneurs know the value of their enterprise at the moment they want to sell it. Why is it useful to conduct valuation of your enterprise? Not only at the that you want to sell it. It is always important and useful to know which factors determine the value of your enterprise.
What is the current value of your enterprise? Are there ways to enhance this?These are all essential things to know now and later if you ever plan to sell your enterprise. The value of an enterprise is determined by the expected future cash flows of the enterprise, that belong to the owner. Thus, not the (subject to influence) profit, but the free cash flows, taken into account the necessary investments.
Value creation differs from aiming for profit
Profit is an accounting quantity. Profit is not per definition the money that goes to your wallet. The point is how much money you actually get as a reward for your investment. Cash you expect to get is value. Formerly generated profit is not value.
Which factors determine the value?
Er zijn drie soorten factoren die bepalend zijn voor de waarde. Geld, tijd en risico.
1) Money: think of how much money has left and entered the company (cash flows).
2) Risk: The risk profile of the enterprise. The lower the risk profile, the higher the value. Think of the dependence on you as an entrepreneur, the dependence on that one supplier, the dependence on that one or two clients, the competitive position, the dependence on specific employees etc.
3) Time: Besides the future cash flows, the time preference, or the moment at which the cash flows become free and available plays an important role in the valuation of a company. When are the cash flows anticipated to be generated?
How to enhance value?
An obvious and most visible factor that influences the value positively, is to secure increasing positive cash flows. This is possible through the enhancement of the income streams and through optimization of the cost structure. Highly important in addition is the need for capital, among which are considered the annual investments in fixed assets and investments in net working capital.
Minimalizing investments in fixed assets is not advisable. This can directly or indirectly influence the quality of the supplied services or products negatively. It can endanger the profitability of the enterprise and the continuity. It is important that enterprises continue to invest in their revenue model.
Working capital is something that can be optimized. An enterprise requires a certain level of working capital in order to exploit the core activities. For instance, these can be debtors or supplies.
When an enterprise grows vastly, money often gets ‘stuck’ in the working capital or the investment in the net working capital is rather high. This indicates that this capital is not to be used freely and thus ceases to contribute to the value of the enterprise.
Value thinking is future thinking. Maintaining course for the company and managing your processes includes, among others, that one thinks in terms of future cash flows and is value-oriented. In contrary to taking action upon the basis of annual numbers, accounting, costs and revenue, of the previous year.
Would like professional assistance in setting up a plan for management participation? The expert Register Valuators of Value Drivers Business Valuators can help.
Your staff represents a great value for your business. Would you like to tie your staff and offer extra motivation and rewards? Opt for management participation. It is a sign that you appreciate the commitment of your employees. You can choose from different plans such as bonuses, options and equity participation. The Value Drivers team can tell you exactly how management participation can increase the value of your company and what the advantages and disadvantages of different forms.
You can use expert help in setting up management participation? You can rely on the specialists of Value Drivers. We advise entrepreneurs in the fields as value management, business transfer, purchase guidance and management participation. For a comprehensive overview of the options you can look under ‘Services’.
Want to set up a plan for management participation, but you are not well versed in the economic, fiscal and legal aspects? We do. Contact us today with us for more information. You can reach us by phone 010-2821517 or via the form under ‘contact’.
For a comprehensive overview of our services further look under ‘Services’. For more information you can also download our brochures.