The Traditional View of Business Valuation
Often, we associate the valuation of companies and businesses with specific moments in their lifecycle, particularly in terms of investment and/or divestment. The importance of determining a company’s value typically arises when considering the possibility of selling, buying, or merging companies and/or businesses.
An important step in the decision-making process of buying or selling involves understanding the fair market value of a business/company and its market price, or its price in a purchase offer. Naturally, this helps to set benchmarks and evaluate not only the feasibility of completing the transaction but also the prospects, which are always important, for investment recovery periods, expected profitability, financing structures, and so on.
Business Valuation as a Performance Indicator
However, from the perspective of HMBO, there is another relevant aspect regarding business valuation, particularly as an indicator of management’s performance in value generation. We believe that the value of a company should be viewed as a KPIM (Key Performance Indicator of Management), to be evaluated annually, in a comparative and evolutionary manner. This allows for the identification of trends, patterns, and areas of concern, providing relevant information and data for a proactive approach to business management.
One of the primary objectives that a company’s management team should have, beyond generating value for shareholders, is the strategic focus on effectively increasing the company’s value. As mentioned, measurement should be regular, on an annual basis, and chronologically comparative, to understand the evolution of value over time and its intersection with critical moments in the company’s development.
By emphasizing the company’s value, we also highlight its dimension as an “asset,” strongly supported from a business perspective. This aids in understanding the key variables that contribute to its value growth, which is important and integral for decision-making. The management’s role in creating company value thus gains broader significance, leading to a comprehensive discussion on the evaluation of the company’s strategy and management performance. Actions that positively influence company value, such as innovation, operational efficiency, and talent development, become crucial in contributing to the medium and long-term sustainability of the value the company acquires over time.
Long-term Success
In summary, business valuation is not merely a tool for specific commercial transactions but a continuous and fundamental indicator of management performance. By integrating this practice as a performance indicator, managers can not only assess the current value of the company but also chart a clear path for the future, identifying areas for improvement and strategic opportunities.
By adopting a proactive approach to business valuation and emphasizing value creation as a primary goal, organizations can strengthen their competitive position, promote transparency and corporate governance, and ultimately generate sustainable returns for all stakeholders involved. Business valuation is not just a management practice but a business philosophy that drives long-term success.
CEO
