THE FOUR KEY DRIVERS OF THE VALUE OF YOUR BUSINESS
Posted on 7, April 2014
in Category blog
Whilst there are a number of different ways of valuing a business, such as capitalisation of earnings and discounted cashflow, there are four key drivers of business value:
- Earnings – Ultimately every business owner is looking to generate earnings from the holding and eventual disposal of any business
- Growth – The higher the realistic growth potential for a business, the more an acquirer would be willing to pay for the business
- Risk – The minimum rate of return an acquirer seeks on a particular business is influenced by the level of risk in the business – the higher the risk, the higher the minimum return required and therefore the lower the value
- Capital management – The higher the level of working capital required to operate the business, the lower the amount of value for the owner
If you are considering selling your business in the next few years, you should focus on getting these four drivers humming:
Earnings – Are you making as much profits as you should? Have you let someone take advantage of your expenses or let your salespeople give away your margin?
Growth – Most people have heard the cliché “sell the sizzle not the sausage”… What is the sizzle in your business? Can you identify and demonstrate a realistic growth plan to a potential acquirer? If not, what are you going to do about developing such a plan?
Risk – One of the key risks in most medium sized business is the reliance and dependency on the owner. What can you do to reduce the reliance on yourself and develop the next level of management? What other higher risk issues should be addressed now, well before putting the business on the market?
Capital – Are you running your working capital as tightly as you should? Do you have excess inventory that should be dealt with? Have you let your receivables get a bit slow in paying? What other lazy assets are resulting in you having more borrowings than you need?
Endeavour Business Brokers, through our Exit Ready program, can assist you in positioning your business to maximise its value when you choose to exit.