Business Value: Are You as Rich As You Think?
Most business owners did not start or buy a business to make tons of money, or take the 5 business value drivers into consideration when starting up.
You put your heart and soul into your business counting on the big payoff to provide the lifestyle you always dreamed. Your business is your vehicle make an impact in your community or industry. You count on it to leave a legacy for your family and live the lifestyle you always dreamed. The question is, “are you rich as you think?” When asked what their business is worth most are not sure. If they do respond it is based on a multiple of sales or some other method they heard about.
Business value is often driven by multiples of sales, net profit or owner’s cash flow. However, there are several other factors that can have a pronounced effect on the value of your business.
Here are 5 business value drivers you need to consider:
A business showing sustainable growth can add business value. Conversely a business showing a downward trend can equally decrease business value even if the business is profitable.
Dependency on Owner
Businesses that are built on the owner’s personal reputation, technical knowledge or relationship with clients can decrease business value. The risk of losing customers increases without the current owner present.
Benchmark to Industry
Buyers will compare the financial performance of your business to others in the industry. Those that perform above industry averages will typically demand a higher price
Buyers of businesses are much like home buyers. If they have to invest time and money to update and create systems they will demand a discounted price as compensation. Businesses with proper systems in place offer a “turn key” opportunity that will usually command a premium price.
Competent Management Team & Key Employees
The availability and capability of your management team and key staff members can affect the value of your business. If management has been effective in running the company profitably it is important that they stay on after the business sale to provide predictable results. If there is a high risk that they may not stay future results are less predictable resulting in a lower business value.
Is you are consider selling your business or developing a succession plan email firstname.lastname@example.org with the word “Succession” in the Subject line. I will send you a copy of “The Twelve Key Questions Every Business Owners Should Ask”
Some business owners will try to avoid talking about the five drivers by focusing strictly on the financial statements. The fact is that a savvy buyer will be checking into these during the due diligence. They may dramatically change or even withdraw their offer if they are not happy with what they have discovered.
Even if you do not plan on selling your business in the next 5 years start working on these drivers now. They will only improve your income in the short term and will build your wealth in the long term.
Tony Malyk, Business Coach
Langley, Surrey, Vancouver