From time to time, I get involved in answering a tricky question. “What is this company worth?” Sometimes the question comes up when speaking to a business owner or executive who is truly trying to increase the value of their organization. At other times the question is raised from someone looking for investors or buyers. And then most importantly – I ask it myself when the buyer or investor might be me.
Years ago, in business school, I had great professors at the W.P. Carey School of Business. They taught me the science of financial valuation and how to look at the opportunities and systematic business risks that lie buried behind the balance sheet. There where times in the learning process when I might have cursed my teachers for being so exacting, but the lessons they taught combined with the insights I gained from my fellow students were worth more than a pot of gold.
Measuring a company’s value falls into 3 categories
What it has – it’s assets
Assets can be real and tangible. We all know about these: property, plants, and equipment plus firm contracts and money in the bank. We can see it, touch it, count it up. Other assets are intangible. We know that there is some level of value, but measurement is often subtle, involving an estimation of the worth. This can be a patent, a trademark, or a customer or prospect list that in and of it self has no hard value, but when put to good use can be converted to tangible assets in the future,
What it lacks or owes – It’s liabilities
On the other side of the equation are the liabilities. Some are easy to measure and take the form of debt, contractual obligations, or other factors that reduce the company’s assets. But there are other more intangible liabilities to factor in like adverse economic conditions, holes in the team, or a lack in organizational bandwidth – you know – too much to do and not enough resources to do it with.
What It promises – Its brand as an organization
And most important of all, I look at what the company promises to its people, its customers, its partners and its investors through its brand as an organization, PLUS its ABILITY to keep those promises.
We all make promises, and most up us do everything in our power to keep them. The question I focus on most closely is can the company turn promise into reality with its unique combination of assets and liabilities.
- Does it have a clear and simple plan that the team can follow to keep the promises it makes? Are there clearly defined goals, strategies, tactics? Are there clear measurement milestones along the way?
- Does it have a culture that supports its team in achieving shared objectives. It’s sad but true. Objectives and goals that are not shared by the team are rarely achieved.
- Does it have the resources to give to that team so that they can execute on the plan? And if not – does it have the ability to get them?
- Does it use its assets wisely? Is it investing in its people and its product to take and hold a leadership position in its markets in the future?
- Does it look at its customers, supply chain, and investors as collaborative partners and treat them accordingly?
- Is leadership committed to keeping the promises it makes to the team, the partners, the customers, and the investors.
- Does every member of the team share that commitment?
The Value of the COMPANY
When I am done with the measuring, I add it all up. What I then have is a valuation of the company in a form that they rarely teach in business school. A clearer picture of whether the company can keep its organizational promise and create value as well as what it may to make that happen, and what I can do to help along the way.
Because, at the end of the day, the true value of any company is in the promises it makes, and its ability to keep them.
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