It can be tempting for business owners to focus on short-term gains versus taking the long-term view. However, the company is likely a business owner’s most valuable asset so it’s worthwhile knowing the drivers of value today so they can start to understand how every decision they make today impacts the future. Whether they want to sell in 1 year or 5+ years, the sooner they start the better because increasing value does not happen overnight.
One of the most common things we hear from new clients is “I just wish I had known all of this sooner!” so we are happy to highlight this information so you can add value to your business owner clients by helping them understand these high level valuation tips, before it’s too late to take action and increase value.
Value drivers include both Quantitative and Qualitative factors. Our past two posts have talked about the Qualitative factors to increase value in a business (read more here and here).
Here are a few key concepts related to the Quantitative factors that increase business value.
1. It’s about more than Growing Sales Volume. Increasing a business’s sales or revenues is different than increasing its value, or the price a potential buyer is willing to pay. Understanding the power of increasing margins, profits and resulting cash flows will provide a much larger payback.
2. The trends tell the story. Looking at any one number from a financial statement does not give enough information to be actionable. Instead, review the company’s last 3-5 years of financial statements to look at the trends of revenues, gross profits and operating expenses (as dollars and percentages). This is exactly what a buyer would do. Does anything stand out as out of the ordinary? Documenting one-time events in the years they occur can later help tell the “story behind the numbers” – versus being seen as a red flag or inconsistency, when it’s time to review financial statements with a potential buyer.
3. Quality goes a long way. Along those lines, quality financial statements with a manageable and consistent number of expense accounts can give a prospective buyer confidence in the accounting. It’s best to have enough categories to be able to get the feedback you need to manage the company, but not have so much detail that allocating expenses between categories cannot be done consistently. Buyers also like third party reviews or audits of financial statements. And, get any personal expenses, assets or liabilities out of the business!
Having a solid understanding of the total financial picture and drivers of value beyond Sales growth will help business owners identify opportunities to increase profits and cash flows and therefore increase value and attractiveness to a potential buyer.
Announcing… Our CapVal team has taken its 46+ years of business valuation to create an online tool BTA+V (Business Trend Analysis + Valuation), which was created to help you provide all of this information to your clients. The BTA+V will identify the business’s trends, provide industry benchmarking and a conservative, reliable business value conclusion. Best of all…...it can be done from your desk, on your schedule. Give us a call at 608-257-2757 or email me at the address below if you’d like to get an early look at the tool!
Cathy is the President of Capital Valuation Group, Inc., headquartered in Madison, WI. Capital Valuation Group has been helping business owners across the country understand, increase and unlock the value of their businesses for over 40 years through keynote speaking, valuation analysis, determining damages and providing expert witness testimony. Cathy welcomes conference and event speaking inquiries and can be reached at email@example.com.