Creating Value in Your Business

small businesses like family business and traditional business do not have any idea what business valuation is
  • BY Jaspreet Kaur

    Feature Writer, BusinessEx

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  • Aug 27,2020
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  • 19 Mins Read

As time is passing by, things have dramatically changed in the business ecosystem. The way businesses were looked was different than the way they are looked now. Mindsets related to the business have also changed and will continue to alter in the coming two quarters. 

"A big worry is that various businesses will exit without having any value," Gaurav Marya, Chairman at Franchise India Holdings, told BusinessEx in BEx Value webinar. 

In essence, small businesses like family business and traditional business do not have any idea what business valuation is. While companies that understand and know the actual value of their business are listed on the stock exchange. Such organisations have unlocked their businesses. 

In its case study MDPI said that the enterprise value is an invariably important issue of the economic essence of ownership, which is closely linked to issues of usability and the problem of the monetary value of an object of property. It is the market measure of the effectiveness and efficiency of actions taken by the enterprise.

Fundamentals of Business Valuation 

An organisation can have a value only if it ultimately delivers earnings. While earning is the intrinsic value of an asset that is determined only when anticipated cash flow is generated by the asset over its lifetime. Also, how uncertain an entrepreneur feels regarding the cash flow. 

Capital- a Prerequisite for Every Business 

At present, raising capital is not a choice of entrepreneurs. Companies have evolved now and will continue to ask for reinvestment. Thus, the present-day entrepreneurs have to re-innovate, reengineering, and also, re-ascertain ways of selling. 

The current business scenario offers the right time to unlock businesses. One such company that effectively used this opportunity is Reliance Industries limited. It has shown the corporate world how a strong asset that can be valued. It has taken out debt from its balance sheet and actually brought several equity partners. 

No Concrete Formula for Gauging Business Valuation 

Although there is not any specific formula to measure business valuation, there are some things that are considered while assessing a company’s valuation. 

  1. When an entrepreneur is designing the valuation, he has to see things from investors’ viewpoint
  2. An entrepreneur has to apprehend a valuation cycle that is rapidly transiting. The main cause is that micro and macro environments are evolving swiftly. At present, the industry has dramatically changed, competition has turned disruptive and invisible competition has surged. 

Therefore, a valuation cycle should be framed in accordance with the cited factors. An entrepreneur has to see where you are and how to adapt to the changes to keep business relevant.  

Importance of Business Valuation 

The current times are changing and demanding for everyone. Entrepreneurs have to see through and get their business model realistic. Coming onto brand valuation, businessmen have to introspect whether it is sustainable, if it would reduce as it grows, what companies are chasing and what inheritance the business has. 

Entrepreneurs have to see changes happening in the business. For example, companies in the retail and manufacturing sector see inventories or stocks as assets in their books. Having too many inventories is also not good. Entrepreneurs basically misinterpret it as a good asset which it is probably not. 

Entrepreneurs should rather focus on business efficiency in their company and therefore, reflect on increasing it. 

Business Valuation 

Valuations are commonly quantitative and become an objective. Entrepreneurs usually sum up values into the business. For instance, startups grow extremely fast in the first three years. After three years, startups reach investors when its growth declines. Startups generally have to create a matrix to showcase numbers that those numbers would not add up. There will always be uncertainty in numbers as they would predict the company's performance and economy in its entirety.    

Tangible Assets 

The companies look for tangible assets as they are actually adding value to the business and balance sheet. On the other hand, focus should be brought on liabilities also like what liabilities there are. After this, entrepreneurs can create a financial matrix.   

SAS Principle 

SAS principle is an effective way to measure business valuation. It stands for Subscriber, Asset and Strategy. Here is explained elaborately:

Subscriber Value 

It is estimating the lifetime value of the subscriber. Businesses should have a subscriber value. 

Asset Value 

It includes fixed assets, current assets and investments, intangible assets, properties, mutual funds, and so on. Entrepreneurs have to gather these assets and assess business valuation. 

Strategic Value 

It is crucial as it gives a certain understanding to the entrepreneur and others as to why a specific asset is there in the valuation. 

Stages of Business Valuation 

Business valuation has basically three stages that are, as follows: 

1. Early-stage Companies 

Such companies do not have any history or data. They employ predictability to show investors that their business is promising. Herein, valuation is 60 per cent over the shoulders of founders, especially in startups. 

2. Medium-sized Companies 

Such organisations have some performance. They are essentially on their growth trajectory. On a growth trajectory, they need some capital to come.

3. Large Companies 

Such firms hold immense historic data. It is further easy to value these businesses. 

The above-mentioned information gives the required knowledge about business valuation. After apprehending the information, small traditional and family-run businesses have to embrace into reality.  

 

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