Because they are preoccupied with day-to-day operations, small and medium-size business owners often neglect maximizing long-term value. Owners should not only pay attention to key long-term value drivers to ensure future success, but also should prepare the company for exit strategies such as additional investment or sale.
Companies in the plastics industry are typically valued on a multiple of EBITDA (earnings before interest, tax, depreciation and amortization). As a result, any plan to improve value should focus on increasing the company's EBITDA, both in raw dollar value, and in relation to sales.
The first in this series described many of the key value drivers that can impact the bottom line, and thus attract interested buyers. These value drivers include improving operating margins, consistently growing sales volume, building attractive customer lists, developing proprietary products, building and retaining a strong management team and sustaining a competitive advantage.
Preparing and maintaining a detailed business plan is a good way to keep the company and relevant management focused on these long-term value drivers. While the plan need not detail every action that is to be taken over the next 10 years, it should give a broad view of the overall company goal.
A key component of this business plan is a realistic understanding of the current status and value of your business. A business valuation cannot only highlight all aspects of your current performance, but it will also help you plan for growth by showing how your business compares with competitors. For example, do you know your competitors' operating margins? Are your margins greater or less than your competitors, and why? All of this benchmarking information can help you focus on improving specific areas within your company.
Having an updated, third-party valuation is also an advantage when you decide to put your company up for sale. A completed valuation will cut your time-to-market and reassure you that you are entering the marketplace with a firm understanding of the true value of your business. In addition, a professional valuation document can be used to support your asking price in the face of stiff buyer negotiation.
Chung is director of adviser services with U.S. Business Exchange Inc. of Santa Monica, Calif.