As a business owner or manager, there are a number of 'levers' you need to control to successfully manage working capital and drive a successful, cash-generating business.
Business value comes in two different ways:
- during the course of operations, and
- at the end, when you sell or pass on your business.
Many people run successful and efficient businesses, but don’t take the time to sit back and ask ‘what is actually driving the value in my business?’
Understanding those value drivers and focusing energy on them is the difference between having a business that runs efficiently today, and one that builds value over time.
Business market appraisals and valuations are both robust assessments of a business’ worth and are appropriate for use in different circumstances.
In this video I explain the difference between a business market appraisal and a business valuation, and when each should be used.
Seeking to exit a business just a few weeks or months after making the decision to do so, is not the best way to optimise value in a business sale.
As I explain in this video, it’s much wiser to incorporate exit and succession plans into your ongoing business planning and prepare for a sale over a period of several years.
Selling a business is a massive undertaking and not one to be entered into lightly.
We created our free Selling a Business Planning Sheet as a ‘first step’ resource for business owners thinking about selling.
The template contains 20 questions designed to prompt you to undertake the necessary thinking, planning and acting that will ensure you and your business are well prepared for the sale process.
The JPAbusiness Strategic Value Checklist has been created to help you drive positive strategic value in your business.
Don't wait until it's time to sell or exit to work on the business characteristics listed in the checklist. While strategic value drivers are not always quantifiable (as we discussed in our free eBook Strategic Value in a Business Sale) they’re not fairy dust either. They can’t be created with a magic wand overnight!
Strategic value drivers result from real actions you can take to enhance year-by-year earnings in your business, and also potentially assist you to capture extra value on exit of your business.
One way of quantifying a business’ strategic value, at least to some degree, is to consider the ‘buy versus build’ scenario.
Ask yourself: ‘If I was to buy this business, what additional value over and above the fair market value would I get and could I achieve that same value simply by growing my own business?’
Often as business valuers we will determine a fair market value for a client’s business and then, under a separate and subsequent engagement, be involved in selling that business.
In general we find that for every 10 people – businesses or investors – who are interested in purchasing the business, about three of those 10 are already operating in the same market.
Goodwill is an intangible value associated with a business and is based on the business' potential to provide a future flow of earnings beyond the current owner.
Stock, plant and equipment, and other fixed assets, are tangible items that can be relatively easily valued on a market. Goodwill is intangible; essentially it is the risk premium around how and what business maintainable earnings (BME) will be delivered into the future if the business is acquired by someone else and run in basically the same way.
When it comes to valuing businesses – listed or private – you will often hear people refer to ‘rules of thumb’. Some will say the value of a business is:
- ‘x times its revenue’ or
- ‘x multiples of its earnings’ or
- ‘a function of its after-tax profit’ or
- ‘a function of its gross profit’ and so on.
These ‘rules of thumb’ tend to be industry based i.e. “a business in Industry A is worth ‘x’ times multiple of earnings” while “a business in Industry B is worth ‘x’ times revenue”. (I won’t repeat the actual ‘rules’ I’ve heard – I don’t want to encourage anyone to use them!)
Business valuation is not an exact science and nor is it a simple science. However there are some factors you should always consider when assessing a business’ value.
The following video lists 3 key factors to consider when valuing a business and 3 questions you need to ask to uncover this important information.