Selling Your Business? Increase Value by $250K in 12 Months
Are you planning to sell your business anytime in the next 5 years? It typically takes 12 – 18 months to optimize business value so the time to start preparing is right now!
Business Valuators use a number of methods to determine business value. A couple of common methods are owner’s cash flow and a multiple of profits.
Owner’s cash flow includes all items the ownership draws from the business. This includes typical items such as salary and profits but can also include “discretionary” items. For example, the owners paying themselves above market value for the job they do in the business, above average company vehicle allowances or memberships to exclusive clubs. A formula of 2.5X owner’s cash flow is often used to determine business value.
Multiple of profits is a formula where the valuator will apply a multiplier to profits to determine business value. The multiplier can vary by industry but a 4X to 5X multiplier of profits is often used.
The good news is that you don’t have to increase net profits by $250K to increase value by $250K. Just by applying the formulas above you can increase your business’s value by $250K by increasing owner’s cash flow by $100K (2.5X) or increase profits by $50K to $60K (4X to 5X).
Other Factors Affecting Business Value
Keep in mind that there are many other factors that can affect business value. Factors include competitive position growth trends, intellectual property and management competence. Value can also be affected by whether the buyer will “roll in“ the operations into their current operations. Alternately, the business may be bought as a “going concern” and continue in the current format.
There many simple strategies to increase owner’s cash flow or improve profits. To improve owner’s cash flow have your financial statements “normalised”. This is a process where your discretionary cash flow is separated from the regular financial statements. A buyer can more accurately determine the true profitability of the business if they chose to not take advantage of the same discretionary items as you.
There are dozens of ways to improve profits such as improving productivity and lowering raw material costs.
To request your free list of “100 Strategies to Improve Gross Profits” email email@example.com and it will be emailed to you immediately.
Understanding these formulas leads to a clearer understanding of value building strategies. Investing some time and energy to make incremental improvements to your business operations and profitability can leverage the value of the business you have worked so hard to build.
Tony Malyk, Vancouver Business Performance Coach