Your company is probably your largest asset so it’s normal to want to know what it is worth. But unlocking the value in your business can be tricky. For you to cash out, someone has to want to buy the company you’ve created. Business valuation is what one might call a “subjective science.”
The science part is what people go to school to learn: you can get an MBA or a degree in finance, or you can learn the theory behind business valuation and earn professional credentials as a business valuation professional.
The subjective part is that every buyer’s circumstances are different, and therefore two buyers could see the same set of company financials and offer vastly different amounts to buy the business.
For your company to be valuable, or even sellable one day there is a lot more to consider than just the bottom line. Few things to consider,
1. How’s the financial performance of your business?
It’s easy to understand however difficult to deliver. It consists of your sales, profits and cash flow. It is important that your business maintains records and has a positive trend to show.
2. Does the business and the industry has potential for Growth?
Most business owners are proud of what they have created and the track record of the business, however the buyer is not focused on the past. They are looking to invest in the future.
3. Are we too dependent on a key employee, a key customer or a key supplier?
For a buyer, if you are overly dependent on any one of these, it increases the risk and they will discount the business.
4. Will our customers continue buying?
It is important for buyer to see that the customers continue to buy from the business even after you leave. Customer satisfaction and Net Promoter Score are the key to this question. A recurring revenue model will help the valuation of your business.
5. Will a new competitor start chipping away our margins?
Differentiation of your products, services or market position, will impact your ability to control your prices. More you charge, more profits you make and are able to invest more in marketing.
6. Could my company survive if I was away for a while?
More dependent the company is on you, lower the valuation. As a business owner, invest in developing right systems and processes to improve efficiency and consistency. Then recruit the right people to run those systems and measure their performance with suitable KPIs.
Whether you intend to keep growing your business, sell it or pass it along to others, its important to understand what drives up or undermines your company’s value. In fact, after analysing more than 30,000 businesses, we have discovered getting these and few other factors right can lead to acquisition offers that are more than twice the industry average. Likewise, we have seen examples of companies getting less than half the industry average multiple because of a weakness in one or more of these seven areas.
Curious to see what your business might be worth? To see how your company scores, you can complete the Value Builder questionnaire and get a report on how you’re doing in each area.