HOW MUCH IS YOUR BUSINESS REALLY WORTH ?
Knowing and Growing Your Value
A 65-year-old business owner started to think about retirement , as many 65-year-old business owners do . He figured he would sell his business to his daughter , who had no liquid savings . Because of his accountant ’ s value calculation , which was based on “ a rule of thumb ,” he expected his company to be worth $ 2.5 million – and to enjoy the retirement lifestyle of his dreams , he would need every penny of that . But after having a professional business valuation conducted , he discovered that his business was actually worth less than $ 1 million .
If he had a clear picture of what his business was really worth five years sooner , he would have probably done things very differently . Rather , he was forced to drastically change his retirement plans .
How a Business Valuation Can Work for You
Imagine the shock , and sometimes horror , of finding out that the path you are heading down isn ’ t what you thought it would be . Unfortunately , this happens to business owners every day . They think they have a good idea of what their business is worth , but alas , they are pretty far removed from reality .
Several family business surveys have found that the majority of business owners don ’ t really know the value of their business . As a result , many business owners fall into one or more of the following traps :
• They make a retirement assumption , based on faulty data
• They sell their business at the wrong price or at the wrong time
• They don ’ t pay attention to the timing of any gifts for their succession planning
• They pay more in taxes
• They don ’ t understand the key valuation drivers and don ’ t make concrete plans to grow the value of their business
This is where a business valuation comes in .
As a business owner , you can ’ t afford to base your business ’ s value on a guess .
‘ Have To ’ Valuations Versus ‘ Need To ’ Valuations
Many of the valuations our team has conducted have been “ have to ” valuations , triggered by some kind of change or major event , such as a stockholder leaving the company or the death of a stockholder . If you find yourself in one of these situations , you ’ ll also find yourself in need of a valuation . by : Mark Fearon
CPA , CGMA , Principal 122 Fourth Street NW | PO Box 1020 New Philadelphia , Ohio 44663 ( 330 ) 339-6651
But even when it ’ s business as usual , it ’ s critical for you to know your business ’ s value . Business valuations shouldn ’ t be a “ have to ,” they should be a “ need to .” Your business is your biggest asset , so don ’ t you want to know what it ’ s worth ?
Key Drivers In a Business Valuation
So , what exactly is a business valuation ?
In plain English , a business valuation is the process by which you find the true value of your company . The major assumptions in any valuation are what the future cash flow is and what the risks are related to that cash flow . There are a number of key value drivers that help shed light on the overall business value .
A business valuation enables you to identify the key drivers that will increase the value of your company . You can determine how measurable changes in these value drivers will affect the overall value . The following are the three major areas where you can focus on in order to increase business value :
• Increase your sustainable cash flow . Buyers buy future cash flow , so increasing the future cash flow of your business will increase its value . Buyers love to buy cash flow that is sustainable and can grow in the future .
• Lower the risk associated with your business . A major factor in determining the price paid for a business is the required rate of return required by the buyer . The more risky the investment , the higher the rate of return needs to be to entice a buyer . There is an inverse relationship between value and the required rate of return . It is important that you understand your risk areas and take steps to reduce them .
• Increase the annual growth rate . The expected growth rate of the future cash flow levels will impact the value of a business . The higher the growth rate , the higher the value of the business . You can increase the value of your business by focusing on profitability and sustainable growth .
Positive changes to these drivers will affect your overall value . You could also benefit from more cash in your pocket , improved employee attitudes and increased customer satisfaction .
The Bottom Line
So your ultimate goal is to maximize your business ’ s value , right ? How can you do this ? You need to increase future cash , decrease business risk and increase growth opportunities . For example , every dollar of additional cash flow you create can increase your overall value four to five times . If you can increase your bottom line by $ 100,000 , your value can increase by up to $ 500,000 . This provides more income for you now and a bigger payoff down the road . How ’ s that for motivation ?
So what are you waiting for ? Get to know your business ’ s value today . Call me to schedule a business valuation .