If you read any of the hundreds of articles on the topic of valuation of privately owned companies, you’ll get a laundry list of important but often esoteric measurements that your investment banker will quote to tell you what they think your company might be worth. Your head will spin as you try to translate all that jargon about ratios, metrics, and multiples into the type of action you should take to make your company more valuable. As a career CFO, let me provide a simpler, more direct, and hopefully more helpful explanation of the best way to proceed.

As you begin exploring the valuation process for your company, consider how you can demonstrate both current strengths and potential growth in the following five areas.

1. Profit. You must have a pattern of profitability over the past 3 to 5 years that is based on steady growth of the business, not one-time events or home runs that aren’t a normal part of your business. That doesn’t mean you can’t have a loss year in there that can be explained away by an anomaly, e.g. COVID-19, but you only get to play that card once. You want a buyer to see the potential for future profits based on the business you’ve built. 

2. Top line growth. A buyer will want the benefit of what is to come, not what you’ve already gotten, and that’s best demonstrated by steady revenue growth over the recent past. Profitability generated by cost-cutting and productivity improvements is certainly a good thing, but it only gets you so far because at some point you can’t get any more mileage out of it. The most desirable source of profits is consistent revenue growth.

3. An ample market size. A market presence that is sustainable with a product line that will continue to be relevant in your marketplace. Having the best DVD rental service didn’t save Blockbuster and a great history didn’t save Sears. Again, your buyer wants to buy the promising future, not the glorious past, and they’d like to believe that the market already knows about your company and what you do.

4. Solid, dependable accounting. The one thing you don’t hear enough about. A financial reporting system and solid accounting are the tools you will use to prove the first two items on this list. If your accounting has holes in it because you (a) save money by employing an underpowered accounting staff, (b) don’t believe in paying income taxes on your profits, or (c) need to hide some pain points you don’t want anyone to see, your hopes for a high-end selling price will quickly evaporate during due diligence. 

5. A credible planning system. Show that you have a budget, or another forecasting methodology that you actually use, that is fed by your accounting history and that shows you know where your money is coming from and going to, and you know how to manage it. 

Gathering and documenting evidence in the above areas as you begin the valuation process will save you time and hassle later on and hopefully lead to the valuation results your organization wants to see.