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What is value and How to measure it Published by: The Hauppauge Reporter, August 2009, Volume 28 - Issue 8, page 8 Written by: Frank Gallucci
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Value How Do We Create and Measure Value? To understand a business, it’s critical to understand value. Exactly what is value? How do you measure it, how do you create it? When and how can we confiscate it? Ultimately, what destroys it? This is the third article in a series of four articles that addresses these questions. The topic of this article will be when to confiscate value. Or simply put, how do I sell my business at a fair and full price. The selling of a business is first a matter of planning. This planning should begin when you launch your business. It is called an Exit Strategy. I realize that this may seem counter intuitive. However, crafting an Exit Strategy before you launch your business will greatly increase your chances of successfully selling your business. Why do you need an Exit Strategy before you are planning to exit your business? An Exit Strategy will provide you with guidance in almost every major management decision related to your business. It will impact the partners you choose, your corporate structure, the capitalization decisions you make, and the products and markets you target. If you don’t have an Exit Strategy, start to develop one today. Timing the sale of your business is always a difficult decision. You may find it useful to divide your thinking into two parts: external factors and internal factors. You cannot control external factors. They include current and anticipated market conditions, the availability and cost of capital, and the competitive environment. Use these factors as friends by selling your business when they are positively impacting your environment. If you do, the market place should reward you with a fair and full price. If you wait until they are negatively impacting your business, you will probably not realize your value expectations. Internal factors such the age of the management team and the age of your machinery and systems, will also impact the sale of your business. Investment in machinery and systems in most cases will result in greater value upon sale. Don’t under invest and expect a buyer not to notice. Investment in your management team almost always results in value creation. People are almost always a company’s greatest asset. For the segment of your management team that will stay with your company after the sale, do not neglect to invest in them. Most buyers will recognize this investment and be willing to pay for it. The hardest internal assessment of all is measuring the effectiveness of the senior management team, when senior management is the founder or the individual deciding to sell. But hard questions must be honestly addressed: Do you have the skills and passion to continue to compete in the market place? Given where the business is now, can you still get the job done? If not, you must call it like it is, and get out. If you do not, the market place will force you out. When crafting an Exit Strategy, many businesses find it useful to consider a time interval of five to seven years. At the end of this time period you do not have to exit, you simply need to create another five to seven year Exit Strategy. You must remember that an Exit strategy is like a will and needs to be reviewed and update periodically. The most important thing is that you have considered your Exit Strategy. If you have not planned for it, it is very unlikely you will find the exiting of your business a satisfying event.
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