You need to track the value of your private business for all the reasons why you track the value of the public companies in which you invest your clients’ assets or your own personal capital. Valuation removes the emotion and provides an empirical benchmark for you to make your decisions.
Sure, there are a lot of other key performance indicators (KPIs) that are informative and useful to the management of the business but in the end they all roll up to the company’s valuation. Why? Because in the end, the reason a for-profit business exists is to create value for its owners.
Knowing the baseline value of your business is the starting point for advisors who want to effectively build a business with perpetual and transferable value. But simply multiplying revenue by an archaic formula isn’t good enough.
Rather, it’s important to understand the underlying value-drivers of a business in order to recognize future potential. Identifying the Key Performance Indicators (KPIs) that really matter to your business will allow you to take an objective look at the health of your business, as well as benchmark yourself against your peers. These valuation metrics focus on the unique set of factors that make every business different.
KPIs allow you to measure success, plan for succession, and improve your bottom line, all while helping you manage your business throughout its lifecycle. Furthermore, the actionable nature of KPIs allows for continuous practice improvement. Once you understand the drivers and how they impact your value, you can then make incremental changes to your business to increase value and profitability, as well as capitalize on the strengths or fix the weaknesses that are driving your business.