How much is your business worth?
An important question given we invest so much into our businesses.
For many small business owners, their business is their largest asset and one that is expected to help fund their retirement. But what is your business actually worth and what sets a high-value business apart?
Every business owner is naturally curious about just how much their business is worth. However, for every business that sells at an attractive price, there are others that struggle to sell, let alone fetch a premium. The question is, what makes a difference?
When you come to sell a business the first question is, what are you selling? In most cases, this is fixtures and fittings, plant and equipment, stock on hand, and the goodwill of the business. Generally, a buyer won’t want to purchase your liabilities or your business structure, nor will they want to collect your outstanding debtors. Most business sales become a sale of business assets.
The value of plant and equipment and trading stock is generally easy to agree upon. The tension tends to arise around the value of goodwill because goodwill is made up of many intangible assets that can’t be readily quantified.
We can all agree that there is value in these assets, but the question is how much? Goodwill is essentially the value of the future free cash flow of the business. Based on how your business is structured, it is the value of the profits the business can generate in the future. This is what a buyer is prepared to pay for.
If a buyer has a reasonable certainty of profits and free cash flow in the future, then this is worth something. By comparison, a start-up business will have a higher level of risk and no certainty that profits can be generated. In general, a new business may need to trade for several years at a loss before it can establish itself and generate profits. Goodwill is what you are prepared to pay to avoid the risk and the ‘time to establish’ factor.
So, what influences business value and what will people pay for?
- A history of profits, profits, and more profits
- Returns on capital invested (better than 30%)
- Strong growth and growth prospects
- Brand name and value
- A business not dependent on the owners
- A strong, verifiable customer list
- Monopoly income – exclusive territories
- A sustainable competitive advantage
- Good systems and procedures
It is possible to get a price that is widely different from the norm. Unique businesses, unique circumstances, and unique opportunities can always produce ‘an out-of-the-box’ price. If you can build something unique, then you may achieve a price beyond normal expectations. At the end of the day, the market will set the price.
If you are planning on selling your business, identify who your buyers might be. There could be a purchaser who is prepared to pay a large premium to own your business because of the accretive value or because it is pivotal to their growth strategy.
And, even if you are not currently thinking about selling your business, the reality is that one day you will. If you build your business with this in mind, then you should look to do the things that will grow your business value from year to year.
Why get a valuation?
Many business owners assume they will only need a valuation when they are selling their business, obtaining finance or for insurance purposes. But even if there’s nothing like that on your immediate horizon, every business owner should know the market value of their business to help them make informed decisions about the business’s direction.
A valuation will identify the elements that make a business valuable, and highlight the areas that need improvement.
If you are planning to grow your business, you need to know what your starting point is. A business valuation delivers a benchmark for comparing annual growth. A valuation will highlight areas for improvement and factors that are hurting your business. Strategies can then be developed to minimise these negative drivers and improve business value.
If you are planning to sell your business in the future, you need to start maximising the value of your business years in advance. A valuation will provide a strategic plan for the development and improvement of your business so you can obtain the required business value by the time you sell.
For business owners with expansion plans, a valuation will provide an accurate industry benchmark and can help you obtain funding.
Do you have a value gap?
If you are depending on your business to fund your retirement or your next venture, you will need to have a good idea of how much money you’ll need for this next stage of your life. The difference between the present market value and the target value of your business is the value gap. Bridging this gap is only possible when you know what the gap is and when you understand what needs to be worked on. Knowing this well in advance will allow enough time for you to implement value-creation strategies to build your business to the value you expect.
How can we help?
Whether you plan to sell, grow, or prepare for succession; managing the factors that contribute to value should be part of your business strategy.
If you’d like to know more about how we can help with valuations, exit planning strategies and value improvement, please contact us on 07 3023 4800 or at mail@marshpartners.com.au.
You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better.
