culled from:bizjournal.com
Imagine two businesses. Owner A works long hours and doesn’t make much money. He hasn’t had a vacation in years and doesn’t really stand out in the market place.
Owner B runs a highly profitable company and takes three vacations a year. Her staff excels while she’s home or away. Her company has distinct processes and a reputation as being the best in the business.
All else equal, for which business would you pay a higher price?
At some point during every business owner’s career, the question of business valuation comes to mind. Whether you are nearing the point of selling your company, or are in the earlier stages of building your business, there are three main value drivers to consider:
1. Profitability and earnings
The first thing anyone considering buying your business will look at is your profitability. Is your business making money?
By and large, this is what buyers want, and the general value of your business is going to be based on a multiple of earnings. The higher the profitability, the higher your business will be valued.
2. Intangibles
Items like infrastructure, intellectual property, brand and strategic fit can have a profound impact on how a buyer values your business, as they impact the multiple a buyer will apply to earnings to determine value. Can the business run while the owner is away? Do you own a patented product? Are you the most established and reputable brand in the market?
The more you can answer “yes” to questions like these, the higher the multiple a buyer will use. Conversely, as these items are absent, multiples decrease and values drop.
3. Real estate, inventory and cash
The market value of these three, plus any other balance sheet items that would transfer with the business, are added to the multiple of earnings value. These are assets that in and of themselves are not crucial to earnings generation, and thus don’t factor in to the multiple of earnings component. They are simply additional assets being sold with the business.
If you are a business owner who will be selling your company in the next few years, or a business owner growing with an eye on the future, building upon and improving these distinct areas of your business will directly increase the value of your company come the day you decide to sell.
