UNDERSTANDING THE VALUE OF YOUR BUSINESS
It is important for every business owner to understand the factors that create value in a business whether you are currently considering selling your business or if that event is still many years in the future. Why? Because how you currently operate your business day to day will impact the future value of the business. Waiting until it is time to sell your business before creating an exit plan is risky.
Understanding the principles below will help you start managing your business day to day so that when the inevitable ownership transition time arrives, your financial benefit will be maximized and the process will be as smooth as possible.
HOW BUSINESSES ARE VALUED
Most small to mid-sized business are valued using the Multiple of Discretionary Earnings Technique. An adjusted cash flow for the business is calculated, then numerous value contribution factors are assessed to determine a value multiplier. This valuation method creates a model that helps the business buyer determine the potential Return On Investment (ROI) that may be realized based on the historical cash flow performance of the business.
WHAT YOU SHOULD BE DOING NOW
Formalize an exit plan today that focuses on your personal transition objectives and time frame. Evaluate your business exit plan considering each of the factors above that impacts the value of your business. Define and execute strategies to improve areas of weakness.
CREATING AND EXECUTING AN EXIT PLAN
It is best to engage a qualified exit planning professional to create and execute a plan that will ensure maximum value for your business and ease the ownership transition process.
FACTORS THAT AFFECT BUSINESS VALUE
- Revenue and profit trends in recent years and in the current year
- Industry trends and growth prospects
- Business growth prospects
- Management team
- Customer concentration
- Competitive advantages
- Barriers to entry
- Ease of operating the business
- Product and service concentration
- Staff knowledge and skills
- Intellectual Property
- Owner goodwill versus business goodwill
- Value of FF&E and Inventory