Understanding the Value of your Business. A Very Powerful Management Tool

Value is measured differently by each buyer or owner 40% of the business sales that fail, fail due to a difference in price and value between the buyer and the seller. The structure of the deal can affect value.

What is my business worth is every business owners’ favorite question. The obvious answer is that it is only worth what someone is willing to pay for it. It will also be worth different amounts to different individuals or companies. Therefore – in order to set a price you need to calculate the estimated value for your most likely buyer.

Value vs. Price: Value is perception – Price is reality!

Buyer and Seller usually DO NOT agree or share same perspective on price.

The potential buyer looks for synergies with his existing business, economies of scale he could realise, will the potential earnings meet his lifestyle’s requirements? Any positive responses will increase the value of the company in his mind and he will be willing to pay more for the business.

The seller may be in hurry to sell as he is facing financial difficulties and is under pressure from the bank. He may be experiencing health issues and do not have any more the energy to manage his business. He could have to settle a divorce dispute. He may compromise on the value of the business and accept a lower offer from the buyer to fulfil his immediate needs.

What factors differentiate a 6 times + multiple business from a three times (an “A” business from a “C” business). These are characteristics that either reduce the risk associated with owning the business or enhance the prospects that the business will grow significantly in the future.

Every business would want these Value Drivers to be in place and risks minimized on each of them as you exit the business to ensure that the business can continue and that you will receive the income stream you need to reach your financial objectives. They can be grouped in seven categories:

1) Marketing: Branding,   Customer Dependence, Dependencies (Vulnerability to economy),  Industry Status (Market Trend),  Market Customer Concentration, Market Niche, Market Penetration,  Market Risk, Market Saturation, Public Relations

2) Operational: Accreditations,  Assets (Equipment/    Machinery),  Cyclical nature,   Intellectual Property,  Inventory Turns,  Licenses,  Obsolescence (Equipment, Systems, Inventory), Portability,  Procedure Manuals, Product Maturity, Purchasing Power, Research & Development,  Regulations,  Supply Dependency,  Systems, Technology, Transitiion

3) Competition: Barriers to Entry,  Competitive Advantage, Product Differentiation

4) Management: Control or Lack of, Family Relations, Knowledge,  Owner Dependency

5) Premises: Aesthetics, Lease,  Location

6) Financial: Benchmarks, Capital Expenditures, Contracts, Cost Controls,  Credit Rating,  Earnings level,  Earnings Sustainability, Financial Cleanliness, Financial Leverage, Financial Plans and Budgets, Free Cash Flow,  Future earnings,   Growth, History, Margins, Receivables and collectability (Liquidity), Risk,  Return On Investment, Sales levels, Tax related (Rational/Irrational)

7) Human resources: Creativity, Cross training, Culture, Efficiency,  Employee Manuals, Employees, Empowerment, Job Descriptions, Key personnel, Leadership,  Unionisation,  TUPE (Transfer of undertakings)

Most of those value drivers are intangible factors which make up part of the value of a business, call: The Goodwill which will be the subject of my article next week.

Find out if your company is sellable take the “Sellability Score” on our website it is free and confidential!

If you have a question or disagree with me please leave a comment on this blog.  I will respond promptly so we can have a fruitful discussion

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If you envisage to transition out of your business in the near future and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk

Comments

Bill Fotsch says:

The 7 points and various sub-points you make are certainly potential drivers of valuation. I would assume you also agree that a strategic buyer may put a value on the company that is different than a private equity or cash buyer. Seems to me that most business owners would not find much value in a long list of value drivers. I would think they would value understanding what are the primary drivers of valuation in their particular circumstance. Does that seem correct to you?

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