In estimating the value of a business, so much time is spent analyzing financial statements. However, those financial statements provide a report card on the business, and whether the management team is making the grade. Human capital is typically the single most important factor contributing to the value of most businesses. Without it, ideas are not hatched, technologies are not developed, and strategies are not implemented.
What Type of Owner Are You?
Businesses are like people, no two are the same. In fact, many businesses take on the personality traits of their owner-operators. For example, a methodical business owner is more likely to have mapped key systems and procedures, documented proprietary technology, or established quantifiable benchmarks for evaluating employee performance. This groundwork can improve a potential buyer’s comfort level regarding the ability to operate the business post-acquisition. In contrast, an owner who is the rainmaker may be focused on marketing, alwa...
For many business owners, the single largest asset in their investment portfolio is the business they own. Unfortunately, when they receive investment account statements from their financial advisors, the value of the business asset is typically missing. Ironically, this asset is normally the largest source (through wages & distributions) used to buy all the other investments in their portfolio. Without the value of the business, you really do not know the total value of your nest egg.
Know the value of your business and develop your exit strategy early. Having all of your ducks (or golden eggs) in a row never hurts, and key decisions could significantly impact the money you get out of your business. If you delay, the financial impact could be devastating. The vultures will circle if they sniff out a business owner desperate to sell.
Whether you plan to eventually sell the business or hope to hand the reins to the next generation, there are five key factors to keep in mind when considering the value of your business: revenue growth, profit margins, asset utilization, financing, and risk. While it takes all five to paint a complete picture, risk is most often overlooked. Higher risk businesses tend to sell for a lower multiple of earnings because the buyer wants a higher return.