Tuesday, 6 September 2011
Realistic Expectation of Business Value
Unfortunately, most business owners have a very inflated view of the value of their company. And why not? They have put so much money, time and heart into it. But they need to realize the price is based on what someone else is willing to pay for it. Periodically having an evaluation prepared by a professional is a good way to help determine what the business owner needs to do to reach his or her goals.
There are at least 3 benefits to this approach.
First, business owners need to have a complete understanding of their business’ cash flow and multiplier. Buyers are typically confortable with reviewing businesses based on the cash flow they have attained and the relevant multiplier. As a business owner, understanding your history of performance and how you can impact both will directly reflect in your business value.
Cash flow is a bi-product of a business’s net profit combined with owner’s salary and personal perks, plus interest and depreciation. Multipliers vary depending on the type of business. The industry and local market help determine a multiple, plus things like new product developments, market share, location, diversified customer base, etc. can also positively impact the multiplier. Business owners need to know what they can impact and how they can ensure a higher multiplier for their business.
Secondly, most sellers know their finish line. It is usually defined by time or money, and in many cases both. If you know you want to sell by the time you are 60 years old, then you need to start positioning your company to sell by your 60th birthday. Waiting for that day to start planning usually means extra time or less value, or worse… both. Evaluating your company periodically will help you understand where you stand relative to your finish line. You may be closer, or further than you think.
Finally, having an outside professional business broker review your business and its value will help depersonalize the exercise and make the analysis credible and realistic. Access to industry statistics and an examination of the factors that positively or negatively affect your multiplier are not necessarily tools at a business owner’s finger tips. Plus the value added process of an explanation of their impact and ways to leverage their role can affect your bottom-line today and when you’re ready to sell.
Business owners don’t want to be distracted from running their business. When you put the analysis in a professional business brokers hands, you get the best of both worlds. You don’t need to do the work and you will get assistance in focusing on the tools that will help you get to your finish-line.
Do you have small business questions you would like answered about this article or others? Please visit www.VRWindsor.com or call 519-903-7807.
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.