It’s not just about a multiple of your earnings (EBITDA)…….
Many business owners just focus on the ‘numbers’ in terms of Turnover and a multiple of Earnings (3 to 6+ times) when trying to get an indicative value for their business. However, there is so much more that should be taken into account when valuing their business. This is especially the case when preparing for a business sale and looking to get the very best price. Preparation is key and getting these eight areas in good shape will help to maximise and increase business value:
1. Financial Performance:
As well as the size of turnover and current profitability, it is also important to show progression and a good financial story form a historical perspective. A prospective buyer will want to understand expected profits into the future as well as the expected rate of return over time.
2. Growth Potential:
What is the potential to grow your business? How scalable is your business? Are there limitations to growth given the current set up? An acquirer will be looking to maximise the return on the current infrastructure and cost base. This is also known as scalability. There are different facets to scalability: with the current set up, are you making the best economies of scale – how much more can you do within the current infrastructure; can you scale in other geographical areas?, can you increase growth through your existing customer base?
3. Over Reliance on Key Entities:
Is the business over reliant on any Customer, Supplier or employee? If your business is too reliant on a single customer (namely it accounts for 15-20+% of your turnover) then it is potentially unstable; Reliant on a single supplier you can be held to ransom; and reliant on any one employee, then they can also hold you to ransom especially when negotiating their terms and task etc.
4. Working Capital and Cash flow:
How much cash do you need to run your business and how easy is it to generate? Do your customers pay you quickly? Is your cash flow ‘lumpy’, do you have to dip into borrowings (overdraft facilities or loans (loans should not be used to finance the day to day running of the business)). Having money in the bank makes running your business that much more relaxed and will help you to finance growth.
5. Sales and contracts:
Companies with a recurring revenue stream are of greater value. A recurring revenue stream helps you predict the future income with much more certainty. Creating a regular income stream through the likes of repeatable contracts etc. is a great way to increase the value of your business.
Is your business one of many offering a similar service or product? If so, you are likely to be very price sensitive as a business. If you can think less about price and more about what differentiates your business from your competitors you will start to look at the value of your offering as opposed to the cost. The more unique that you can make your business offering the more you will increase the value of your business.
7. Your Customers:
How happy are your customers? The more satisfied that your customers are the more that they will come back to you and the more repeat business you can do – not to mention good referrals etc. Being able to prove that you have highly satisfied customers through surveys etc. to a prospective purchaser of the business will certainly increase its value.
Although last in this list it is probably the more important facet. Ask yourself the degree to which your business can prosper without you. Business owners who remain involved in the operational day to day running of their business are devaluing their own business considerably. Your business should be run as an asset rather than a life-style if you are looking at getting maximum return. You cannot manage the growth of your company if you are dealing with day to day crises, unhappy customers, disgruntled employees etc. The more the owner does this the less valuable the business will be.
It is not just about the numbers when you are valuing your business in preparation for sale, these other facets briefly detailed above are just as important. They may even help take the stress out of owning your business and lead you to enjoy running your business even more than you already are. If you would like help and advice in getting in good shape, whether because: it’s just good practice and you want to reduce your own stress and enjoy your business; or, you want to get your business ready for sale or acquisition so that you can get the best return, please contact Rupert Beazley on 07880 221818 or complete our value questionnaire and we would be pleased to have a free initial discussion with you.