Business valuation concerns are just as important to industrial automation leaders as they are to owners in other big market sectors. Our friends at Capital Valuation Group recommend getting an early start and treating valuation like a routine investment check. We have collected some insights here on how to adopt that investor mentality and apply it to your business.
The Sooner You Start Thinking About Valuation, The Better
Some owners, especially in smaller private firms, tend to view valuation events as insurance – something you avoid thinking about until you absolutely must. Capital Valuation Group points out that reversing that mindset can be advantageous – the sooner you start thinking about valuation factors, the better. It turns out that elements that prepare you for a sale or acquisition in the future also boost performance and company culture today.
5 Key Valuation Considerations for Industrial Automation Firms
- Pay close attention to incremental investments that boost the value of your firm
- Look at your firm’s concentration of ownership and retention of key employees
- Stay alert for over-reliance on a few key customers
- Add forecasting skills to your financial tracking disciplines – buyers buy the future
- Apart from data, prioritize the human side of business valuation awareness
The important thing is to start getting the value drivers of your business in order now, so that when the right opportunity pops up, you’re ready to move.
Adopting an Investor Mentality Toward Business Value
Keeping an early and continuous pulse on the value of your business could involve expanding capacity or replacing outdated equipment. It may mean addressing risk factors that you can control. For example, do you know the age and condition of your key assets? Is your customer base diversified? Are your key processes documented? How leveraged is your business as it is structured today? Is your management overly concentrated in one key leader?
Taking an Investor’s View of Management Structure
Serious buyers or potential M&A partners will scrutinize the relationship between owners and other key employees and the future value of the company. The best way to protect your business value from being discounted due to dependence on key employees is to establish standard operating procedures and processes. This ensures the business can continue to operate effectively in the absence of those employees. Another option is to incentivize these key employees to stay with the firm through and after the transition. Having top performers assume some form of ownership stake helps to boost long-term value.
Staying Vigilant about Customer Concentration
While most business owners strive for a diversified customer base while running the business, they often fail to consider the impact this may have on potential buyers. Since buyers are purchasing the future cash flows of your business, generating a significant portion of your annual revenues from one customer puts those cashflows at risk if the buyer were to lose this customer. If you depend on any single customer for more than 10 percent of your revenue, this could make your company look vulnerable in the eyes of a potential buyer. The earlier you start considering value factors like customer concentration, the sooner you can make corrections in your book of business to reduce your dependency on individual accounts and stay profitable.
Taking a Balanced View of History and the Future in Your Financial Reporting
The traditional valuation process often starts with a backward look at your last two or three years of financial performance, but that does not always tell the whole story about the value of your business. Owners and principals need to develop skills in forecasting the future financial performance of the business. This will not only help them be more effective at managing the business but will also provide confidence for a potential buyer. A solid track record of being able to forecast the performance of the business provides additional confidence in the projected future cash flows the business valuation will be based on.
Taking the Human Factor into Account
One of the most common objections we hear to adopting these kinds of valuation practices as a regular business health regimen is that employees may think their jobs are at risk. The best remedies for this kind of flight risk are transparency and inclusion. It is important for everyone to understand that continuous value awareness also benefits their personal stake in the firm’s success. By making value conversations a regular part of your routine business checkups, it will be easier for employees to see how these practices make your firm a better place to work.
Continue the Conversation
Clayton & McKervey advises industrial automation companies on business valuation, succession planning, ESOP programs, and strategies to boost overall financial health. We invite you to contact us for a consultation on your individual business needs.
*Updated on 4/10/23
