Business owners often have an idea of what their business is worth, but that figure may be based more on hope and expectation than hard evidence.
Valuing a business is not simply a matter of looking at annual turnover or the assets shown on the balance sheet. A purchaser will normally be particularly interested in the profits and cash flows that the business could generate in the future.
For many owner-managed businesses, valuation begins with maintainable earnings. Accounts may need to be adjusted for unusual or one-off expenditure, owner remuneration and costs that would change following a sale. An appropriate valuation multiple may then be applied, although the multiple itself will depend on the quality and perceived risk of those earnings.
A number of factors can influence value. These include recurring income, customer concentration, the quality of management, dependence on the owner, intellectual property, growth prospects and the reliability of financial information.
Two businesses producing identical profits can therefore have quite different values.
For example, a business with recurring revenues, documented procedures and a management team capable of operating without the owner may command a higher valuation than a similar-sized business where everything depends upon one individual.
Even if you have no immediate intention of selling, obtaining an indication of value can be worthwhile. More importantly, the valuation process can identify weaknesses that are reducing that value.
If retirement or sale is perhaps five years away, there may be plenty of time to address those weaknesses.
Improving systems, reducing owner dependence, strengthening recurring revenues, diversifying the customer base and developing management can all make a business more attractive to a future purchaser.
The key is to start early. Do not wait until you are ready to sell before finding out what your business might be worth.
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Published by The NAS News Team
