One interesting question that comes up during a valuation engagement is if the value of a company can change on a day-to-day basis.
While this may be true for publicly-owned companies, since stocks change price every day, it is not something that is generally experienced in privately held businesses. For these businesses, the value shift occurs over time.
Here are some examples of reasons for a change in business value:
- Addition or loss of a significant customer
- Introduction of a new product or service
- Change in management/depth of management team
- Expansion of services into new locations
While all of these events would impact the cash flow of a business, resulting in an increase or decrease in the company’s value, none of these happen overnight. Even a change in key personnel tends to take a period of time to impact a Company’s value.
Owners always strive to avoid a decrease in the value of their business. Even when significant events occur, there may be ways to mitigate the situation or plan in advance to cope with the changes. Good backstops include having a working capital reserve, a solid budget in place, formulating an action plan to grow the business and a succession plan for management.
There are obviously many risks associated with running a business:
External risks – events or trends the owner can’t control
- Economy – national, regional and local
- Industry changes – broad changes in the industry such as technology shifts
- Geographic events – e.g., recently problems at an Indiana oil refinery boosted gas prices and transportation costs for the entire region
Internal risks – risks the business owner has control over
- Financial risks – cash flow problems, defaulting on a loan, etc.
- Operating risks – problems associated with the day-to-day running of the company
- Are your workforce skillsets diversified? Can a job be easily transitioned to another person?
- Not enough cash flow to pay for operations of the business or finance the growth of the business
- Is there sufficient workforce in place to meet demands?
As you can see, there are many factors that can affect the value of a privately held business over time, and many opportunities to ensure it doesn’t taper off.
The important recognition for the business owner is to focus on the factors that drive value into the business and create wealth. Very few companies are successful without proper planning. The owners must be deliberate in their actions and demonstrate prudent leadership to create and enhance the wealth creating factor for that enterprise.
If you would like to talk about planning within your business or have further questions or comments, please contact Amber Hoover at (317) 613-7844 or [email protected].