What is the quickest way to propel the value of your business, you ask? This is an easy one. Increase your revenue to greater than 5 million dollars. That’s it. You would be surprised to know that businesses turning over greater than $5m are valued at a dramatically higher selling price than smaller businesses. In fact, about 60% higher when valuing using a multiple of profit calculation.
Smaller businesses, don’t for one second think this number is out of your reach. Henry Ford had a famous saying; “Whether you think you can, or you think you can’t – you’re right”. How to achieve these numbers are saved for a Planning Session or an Advisory Board to workshop, but the fact of the matter is that this alone can slingshot your valuation.
But what if you are already doing these numbers? Well for starters, congratulations! From here I suggest you begin with the Top 3 Business Challenges plus the 8 Steps To Make Your Business More Attractive.
So why is it a good idea to get a regular valuation on your business?
- to use for strategic decision making;
- for estate planning and succession planning decisions;
- when investors are considering buying in or selling out;
- to access funding, be that equity or debt funding;
- as a benchmark for performance;
- for capital gains tax purposes
- for insurance policies backing a buy/sell agreement
- if you want to sell your business
- if someone makes you an offer to buy all or part of your business
You put a lot of hard work into growing your business and most commonly, contributing some of your own personal money. Let’s compare this to the share market or a residential property. Recent figures show that over the last 10 years, the return on these two financial products are around 9% per annum. Remember, that’s 9% return and all you have to do is sit on the couch. So how does this stack up against the investment you have made in your own business? What return are you getting? Until you complete a business valuation, it is only an assumption.
A business valuation is not simply crunching some numbers and comparing to your peers. The majority of the work is in the initial analysis phase, which also happens to be an amazing opportunity to identify some of the highs and lows of your business. A great tool is the Porter Five Forces Framework which will help to analyse the level of competition within an industry and business strategy development. The questions you need to workshop are as follows:
- Bargaining Power of Suppliers: suppliers can be a force of power over the business if the business is reliant upon them e.g. let’s say you are making grass-fed burgers and there is only one person who sells this particular type of beef, you have no alternative but to buy it from them.
- Bargaining Power of Customers: this is the ability of customers to put pressure on the business specifically around price sensitivity e.g. if you sell tomatoes and you put your prices up, the customer can easily demand you lower the price or they’ll go to another vendor.
- Threat of New Entrants: what are the barriers to entry for new business? A profitable industry will attract new businesses, so how difficult is it for new businesses to pop up and take some of your market share? e.g. you may require a certain tertiary qualification, high start-up costs or government approval etc.
- Threat of Substitute Products: innovation of products outside what is currently available. Could someone, either soon or in the future, create a substitute product that would tank your current offering? e.g. the iPod crushing the CD player or perhaps something like Facebook or Flickr taking over from traditional avenues like Kodak.
- Competitive Rivalry Within an Industry: do you have a monopoly over your industry or are you one-of-many? A monopoly will always earn the most profits whereas a competitive market place will drive the price down. Let’s take fuel for example (that’s gas for our USA readers). In the city there are many distributors so they are price competitive, whereas out in the country there might only be one fuel station in town so they can charge a premium, because where else are they going to go?
A business valuation is something you should put on your radar and is something to seriously consider. The process will most likely be like nothing you’ve ever experienced and that alone may help you to understand where your business is at, and what levers you need to pull to get it to where you want to go.