Valuations, Investors, and You: Don’t Leave Money on the Table

October 6, 2011

12:00 pm

There will come a time when you need to know the REAL value of your company. Not the balance sheet value, but the bona fide, intrinsic, captures-everything-possibly-monetizable value. For some entrepreneurs, this need arises when the time and the money are ripe for an exit. For others, the need will come sooner, like when you’re raising capital to grow or launch a new product.

Most of us, unfortunately, don’t know what our companies are really worth. The seed of the problem, I think, is that entrepreneurs are busy. Very busy. When I started my company, I’d plan on finishing all 30 things on my to-do-list in the morning, but no matter how hard I tried, I’d have 40 to-dos on the same list at the very end of the day.

In the race to be some combination of better, stronger, faster, and smarter than our competitors, it’s easy to forget about using everything we have and have already accomplished fully.

The intellectual capital and technical know-how of your company are some of your most valuable assets. In fact, intellectual capital is probably the most significant part of any company’s value. One great study found that only 15% of the “true intrinsic value” of S&P 500 companies is captured in balance statements. Given the resources of the S&P 500, it’s very likely that smaller business’s intangible assets are even more deeply embedded—for private companies, balance sheets might capture only 5% of value. Put another way, in the worst-case scenario, your valuation could be 95% off in the buyer or investor’s favor.

The gap in capturing and reflecting the hidden assets of your business is hard to close, but if you start the process now, things will be much easier when opportunity (and valuation time) comes knocking. The process is long and something of a black art. That aside, the starting points are these:

1.     Know where value hides. Intellectual capital includes a staggering array of human capital, relationship capital, and intellectual property. More specifically, there is value in your internal systems and processes, the skill and competence of your workforce, your channel partner relationships, your customer service systems, your joint ventures, and for some companies, even in smells.

2.     Know what you have. Once you know where to look for value, you can identify assets. This is really not easy—some things that look like the intellectual capital equivalent of children’s paintings can really have Picasso-value, and vice versa. This might require an outside expert at some point, but you can get ready for that time now by considering what you have that is or at least may be of value and keeping tally.

3.     Work the system (after you create it). Fully levering your intangible assets requires planning and an Intellectual Asset Management system.  Start with creating a plan for turning your assets into revenue streams and more opportunities. Once the plan is implemented, you’ll benefit from better revenue accountability, enhanced competitive advantage, better financial performance, and improved operational efficiency and, of course, a much more robust understanding of the value of your company.

At the risk of being dramatic, it is a deadly strategic sin not to squeeze value out of everything you can. More value means more money, and more money means more opportunities for your company.

Andrew J. Sherman, is a strategic growth expert and a partner in the Washington, D.C. office of Jones Day. His new book, Harvesting Intangible Assets, is available on Amazon.

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