by Mark Henricks

After more than a decade in which other forms of investment stole the limelight, business owners are only beginning to wake up to the hidden value in their own enterprises, says Ray Manganelli, author of Solving the Corporate Value Enigma. Manganelli says the average business creates only 60 percent of the value it is capable of creating. Is that all bad? Not necessarily. That means entrepreneurs may be able to increase the value of their companies by 40 percent simply by paying more attention to it. “It’s a tremendous prize,” Manganelli says. “And that prize can be the difference between profit and loss, between surviving and folding.”

Why Build Wealth?
Dean Dinas, senior economist and director of the Center for Economic and Industry Research for the National Association of Certified Valuation Analysts (NACVA), a trade group for valuation professionals, estimates only about 5 percent of small businesses have had a formal valuation done by a qualified professional. One reason is entrepreneurs are too busy running their companies to be concerned about the value of those companies. Also, some don’t think they need to build or measure the value of their companies unless they plan to sell.

There are, however, dozens of reasons to know and increase your company’s value, none of which have anything to do with selling it. Before you set up a buy-and-sell agreement with a partner, decide how much life insurance to buy as part of an estate plan, create an employee stock ownership plan, or apply for an SBA loan, you must have a documented value for your business, Dinas says.
Many entrepreneurs rely on balance sheets, income statements or a gut feeling to estimate their companies’ true value. But balance sheets and other financial statements used in the daily operation of a business are only the beginning when it comes to valuing a business. Intangibles such as customer relationships and human resources don’t show up on balance sheets but are essential to accurate valuations.

Value 101
The price the company might sell for on the open market is the basic value benchmark. This can be determined by examining recent sales of comparable businesses. But no two businesses are the same, and selling prices vary according to what the buyer is looking for.

Expected future cash flow is the most common basic benchmark for setting value. So, typically, you build value by increasing the amount of profit your business can be expected to generate in the future. You can also boost value by increasing sales or some derivative of revenues. Both methods show your company is on a strong growth track. Unfortunately, however, healthier companies aren’t always worth more. If you’re in an industry that’s on the decline, for example, company value will likely slip.

Building value, notes Manganelli, is often counterintuitive. You may have to go against industry wisdom or sell off assets you would rather keep. Often, entrepreneurs find it’s essential that they de-emphasize their own role in the business if they want to be seen as more valuable. Other times, they may need to terminate longtime employees and bring in replacements.

Building Wealth Now
The good news is that now is a fine time to invest in building the value of your company. And it’s not because other investment options may be less appetizing. A few years ago, one of the biggest complaints of entrepreneurs was that they couldn’t hire enough good people to expand.

That’s not a problem now, says Nate McKelvey, CEO of CharterAuction.com, an online booking service for private jets, with 25 employees. “It’s a fantastic time to find talented people,” says McKelvey, 35. “When I started in 1999, anyone who had computer experience could make six-figure salaries. Those days are over.”

Now, instead of paying inflated salaries, McKelvey can employ his company’s value to build value, as he did recently by acquiring a smaller company loaded with talented employees in exchange for minority ownership in CharterAuction.com. The move preserved cash, encouraged the new personnel to accept reasonable salaries, and locked in talented people by giving them ownership.
Other entrepreneurs say now is a prime time to purchase low-cost inventory, finance capital expenditures at low rates, or improve internal accounting and management systems to boost your company’s visible value.

Building value doesn’t have to cost much money, much equity or even much time. Manganelli says the most powerful value-building systems are based largely on attitude shifts. The first and most important step occurs when a company’s leaders start paying attention to deploying strategy, assets, operations and measurements in a systematic fashion with the goal of increasing value. Still, he says, “It is hard to do because it requires action on a lot of different planes.”

But building value can be done, and entrepreneurs are waking up to the fact that the best place to make a killing in investments is right in their own companies.

Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.