Create engineering value in an automation or system integration business
Integrator Update, Part 1: A system integration business, automation industry consultant, original equipment manufacturer or panel builder all need to consider the business itself as the most-valuable asset and manage that business as if it’s an investment.
How can an engineering business create value? It's a common dilemma in an engineering firm for a business owner to wear many hats and get caught up in engineering, along with other, perhaps less fun, day-to-day business requirements. It's critical to the company's long-term success (and retirement goals of the owners) to carve out time to look at the system integration business, automation consultancy or training business, or the original equipment manufacturing (OEM) or panel building business as any other investment. This sounds easy enough, but it's not easy without knowing where to start. For example, what are the key drivers of value for a successful system integration business? What can make the business attractive to a buyer down the road?
Manage the most valuable engineering asset
A business is typically the owner's most valuable asset, and in recent years savvy business owners are increasingly looking at understanding the value of the business. Doing so is a proactive step in thinking about the business as an investment. It would be unheard of to not check on the performance of a 401k retirement account for 20 or more years, and the same philosophy should apply to actively managing the value of a business.
A common problem arises because business owners often believe the business is worth more than it is. This happens for many reasons, including sentimental attachment, a business not matching actual market value, an assumption that a multiple of revenue or earnings provides an accurate representation of value. Another scenario is that business owners receive guidance from a financial planner as to the amount the owner needs to retire comfortably, and the business owner assumes this figure as the value of their business. Unfortunately, these two numbers are completely unrelated.
Whether the plan is to sell the business in the coming years or pass the business to the next generation, it's necessary to know the value of the business investment and how that changes over time. Typically business owners have an initial business valuation done and then update it at least every 2 to 3 years as the business model and outlook change.
Clarity unleashes opportunity
The good news is that once the actual value of the business known, it is possible to increase value. With time and knowledge, business owners and other stakeholders can increase the performance of the business investment to a much greater degree than is possible with a traditional 401k. The upside potential is there if it is managed, and time is devoted to doing so.
Accurate information from a business valuation aids in making informed business decisions and provides realistic data for personal retirement planning and/or investing in the future of the business. Whether business-value numbers are more or less than perception, having knowledge about current state, goals, and the gap between the two, provides measurements needed to take action.
Understand, drive value
This begins a 9-part series to help system integrators and others who want to understand the drivers of value in a business and learn how to increase company value.
- Here are some engineering business topics provided in this series:
- What makes a business attractive to a potential buyer?
- Who might be the buyer of an engineering business?
- What are the key drivers of value in the business?
- Why shouldn't multiples of revenues or earnings be the only value of a business?
- How are system integration businesses valued?
- Are there special considerations when there are multiple owners?
- How can the value of a system integration business be increased?
How much is an engineering business worth to a potential buyer? Looks can be deceiving. A business can appear to be successful; two key questions quickly identify whether an educated buyer would be willing to pay more for a business than the value of the tangible assets. Part 2 will cover these topics.
- Engineering firms should be considered an asset.
- Knowing company value helps with business decisions to increase value.
Before changes can be made in a control loop, accurate measurements are required. Changes to an engineering business can benefit by knowing the value of the business.
Coming soon: A link to part 2 in the Business Valuation Article Series will be offered below.
More about the author
Catherine J. Durham is a principal of Capital Valuation Group where she serves as president. For more than 20 years, she has specialized in assisting owners and advisers of closely held businesses in the areas of business valuation and litigation support. Durham has managed, owned, and sold businesses and has served as a director of a number of businesses and nonprofit entities. She serves as an expert witness in state and federal courts; works with business owners on valuations, succession planning, and increasing value in their businesses; is a professional business speaker regarding various business valuation topics; and teaches on a regular basis to attorneys, judges, business owners, and advisers. She co-authored the firm's publication, "An Introduction to Business Valuation," and has presented at a number of Control System Integrator Association (CSIA) conferences.
Durham serves on the Board of Directors of State Bank of Cross Plains (Wisconsin). Previously Cathy served as a board member of Meriter Hospital (Madison, Wis.) 2007-2016; the University of Wisconsin Business School-Nicholas Center (Applied Corporate Finance program) 2009-2015; Midwest Business Brokers & Intermediaries 2012-2014; Food Fight Inc. (a Madison group owning 18 restaurants), Madison Downtown Rotary Club, The Business Forum (past president), and the Madison Children's Museum. Cathy also was the past chairperson of the Rotary Budget and Finance Committee and served as a trustee of the Madison Rotary Foundation.
Durham earned her BA degree, cum laude, from Washington State University and her MBA degree from the University of Wisconsin-Madison. She also earned the American Society of Appraisers' Accredited Senior Analyst (ASA) designation.