Accounting and Consulting
Enhance your value
Knowing what your business is worth
By Lisa Murton Beets
Smart Business Detroit | May 2008
John T. Alfonsi, CPA/ABV, CVA, CFE
Partner
Cendrowski Selecky PC
What are your goals for exiting
your business? Will you need
cash for your retirement? Do you plan to leave it to your children? Do you
sell it to a competitor or your employees? Whatever your goals, it is important
to start planning for the future now.
“Every owner should know the value of
his or her business and have an exit
strategy,” says John T. Alfonsi, CPA/ABV,
CVA, CFE, a partner with Cendrowski
Selecky PC, Bloomfield Hills. “Whether
trying to minimize estate and gift taxes
on a transfer to family members or
reduce income taxes on a sale, the
owner’s objective is to maximize value.”
Smart Business asked Alfonsi how
owners can start focusing on value now
to prepare for a successful outcome in
the future.
What are value drivers, and why are they
important to a company?
Value drivers are areas that have an
effect on a business’s value — they
enhance or preserve the value of the
business and are unique for every business. While earnings before interest,
depreciation, taxes and amortization
(EBIDTA) — or cash flow — is important, it is not the only area to focus on.
Value drivers impact an entity’s multiple
and include such things as having a
unique product or service. What differentiates you from competitors? Do you
have something another company can’t
create or is difficult to reproduce? A
patent? A copyright? A coveted location?
Unique distribution channels? Employees or work force in place can be a value
driver for a service-oriented business.
Do you have a skilled team in place in an
industry where there is a high demand
for talent?
What is a multiple, and how is it used to
determine value?
EBIDTA is a close marker in regard to
cash flow. Cash flow is a driving factor
when valuing a business but so is the
‘multiple’ that someone is willing to pay for your business. A multiple is the
inverse of a discount or capitalization
rate that reflects the risks inherent in a
business or what the acquirer perceives
as risk. The lower the risk, the higher the
value; the higher the risk, the lower the
value.
Say your company generates $1 million
of EBIDTA. Depending on the company’s
value drivers, a seller might be willing to
pay four to six times EBIDTA for your
business. So the selling price could range
from $4 million to $6 million. What
moves the price from the $4 million to
the $6 million? The nonmonetary factors.
How should an owner evaluate these non-monetary factors?
Make sure cash flow is existent and
consistent, but look at all the factors a
potential buyer would examine, as well.
Of these, the most important may be
strategic fit. Oftentimes, a purchaser is a
competitor. How would your business fit
with the purchaser’s? What do you have
that would be difficult for the purchaser
to get without obtaining your business?
Other factors include:
Management — A business that is
highly reliant on one owner will probably be worth less than one with a strong
management team in place. Far too
many times we see businesses reliant on
one owner. There may be good ‘lieutenants’ in place that could continue to
function without the owner but not as
effectively as they had with the owner at
the helm (either due to the loss of the
owner’s personal relationships and/or
his or her unique knowledge). Owners
should start grooming employees to take
over in the future. If you have good people in place, offer them incentives to stay
with the company.
Customer diversity — Your business
should not rely solely on one key customer. Any single customer that represents more than 10 percent of revenue
and/or profits may be viewed negatively.
What happens if the customer is no
longer there?
Recurring revenue stream — Long-term contracts are more predictable
than those that go from year to year,
month to month or job to job. They pose
less risk and, therefore, create higher
value.
Perceived industry leaders — Being
perceived as an industry leader creates
higher value. Get in front of the media
however you can. Get quoted in articles
in trade magazines, write a column
about your area of expertise, go on a
local radio talk show, be active in the
community.
Have a strategic plan — Many small
businesses overlook this, as do some
larger, too. Your strategic plan doesn’t
have to be long, but it should list your
goals and provide a focus for the company. Where are you headed? What initiatives are in place to make your plan a
reality? This will show that your business is focused, that you know where
you’re going and that you have taken
steps to achieve your goals.
JOHN T. ALFONSI, CPA/ABV, CVA, CFE, is a partner with Cendrowski Selecky PC, Bloomfield Hills. Reach him at (248) 540-5760 or
jta@cendsel.com.
