Most business owners only value their business when they are thinking of selling their business. This short blog argues that a business valuation should be done throughout the life of a business. This will help guide the owner to focus on the broader issues that drive the business valuation as well as building a business with more sustainable profit growth.
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.
‘The water was cold and shook me up. It was another few seconds before I realized that I accidentally drilled into a water pipe behind the plasterboard during one of my weekend DIY (don’t!) projects at home. With one hand covering the leak I frantically called a local plumber – who thankfully happened to be in the neighbourhood.
He was helpfully skilful and smoothly billed me £200 to seal the hole – a job that took him less than a minute.’
So why was I glad parting with my money and not fuming (I was, at myself, but not him)? What I needed was a skilled, well-equipped professional to be available immediately. The plumber was able to provide me with flawless service that roundly fit my requirements.
Despite all this, pricing for goods and services is rarely simple. One reason being service providers rarely take is a value-based approach to pricing. Not bandying hackneyed buzzwords but what you can charge as an individual or organisation often reflects the value or perception of value your customer places on the offering. Improving this perception is then a matter of digging deep to understand what the problem or need of your customer is and then figuring out a way to best solve that requirement.
So how should SMEs (or any other) businesses think about pricing? Here is a starter kit: …
Do you hope to sell your business in the future? Is your SME business investment ready?
If you are planning to exit or sell your business in the future you need to ensure your business is growing and operating in the right way focussing on 4 key elements to ensure your SME Business is Investment Ready.
Listen to our Derbyshire and Staffordshire based CMC Partner, Richard Lloyd on the 4 key principles of running a business, helping you to grow and build value in your business to ensure you are ‘Investment Ready’ when the time comes to exit or sell your business.
Have you ever thought about buying a business?
Thank you for attending the Thames Valley Chamber of Commerce webinar on 17th October where our CMC Partner, Atreya Chaganty discussed whether a Merger or Acquisition would be a suitable option to help your business growth.
During the webinar Atreya explored how SME’s can successfully acquire companies and generate positive returns for their stakeholders, whether M&A is the best option and what the alternatives are.
- Exploring the link between growth and acquisitions
- How should you weigh the risks versus rewards of acquisitions?
- What should you do in preparation for an acquisition?
- How should an acquisition be executed?
Book your Free Appointment:
Atreya is offering a free confidential meeting to all attendees to explore the potential of M&A in your business, just complete the contact form below.
Like many business owners, you have devoted immeasurable amount of work and resources on developing your business. When you are busy with every day operations, it’s difficult to find the time to think about your exit strategy or retirement plan. Developing an achievable exit strategy is an essential task and too few owners give it proper consideration. An exit strategy can benefit your future. It can help you realise your businesses full potential whilst maximizing its sale value.
74% of entrepreneurs in the UK risk long-term business success by not giving proper thought to their exit strategies’ Deloitte Entrepreneurship: UK 2008
With all that you have invested, doesn’t it make sense to plan an exit from your business to protect your future?
What is an exit strategy?
An exit strategy is a plan on how you intent to leave the business. We know this is not as easy as it sounds. Your business has been a significant part of your life and dreams. Contemplating a future apart from it can be difficult to visualise. As hard as it may be, you need to start thinking about your own goals, targets and timescales to ensure your exit is within your control.
What should an exit plan include?
Your exit plan can be a simple one page document but should include:
- Your preferred exit option
- Deal Structure
- Preferred buyers
- Business valuation considerations
The key is to understand that an exit is a process that may occur over many years and there’s more exit options than simply selling your business. For example you may choose to set up a management team in order to take a back seat while receiving a regular income. To understand more about the various exit options, we recommend you read this blog
An exit strategy ensures your vision of the desired outcome is achieved and helps to minimise the risk of failure or disappointment.
Carefully planning your exit from your business has huge benefits:
- exit your business at a time of your choosing, when the business is doing well and the market conditions are advantageous
- mould your business into the ideal shape for your chosen exit option – maximising the value you get from it
- prepare successors if they’re coming from within the business, this could be a family member or part of your management team
- prepare the 2nd tier management team, if you wish not to sell but draw a regular income from the business
- make your business more appealing to potential buyers, if you wish to sell
If you don’t have an exit plan in place, we would recommend you think about creating one now, even if you expect to work for another 10 -15 years. Preparing a exit strategy is good practice and can help shape your business to achieve your future plans for life beyond your business. To help improve your chances of a successful exit we have complied a short 10 point checklist. Download here
CMC Partners can help sell your business successfully. Selling your business is a big lifetime decision and its not something you should take on your own. Watch this video to hear how CMC Partners can guide you from developing your exit plan with you, building the value of your business to increase its worth to selling your business.