Having a formal valuation performed by a qualified valuation expert is something every business owner should consider, especially if they haven’t had one done in the past, says Steven J. Piatak, CPA, ABV, CFF, CFE, Senior Manager, Valuation Services and Fraud Prevention at Barnes Wendling CPAs.
Smart Business spoke with Piatak about business valuations and why you need to have your business ready to be sold at any time.
The following are key components that can impact the value of your business:
■ Management/processes — Is your business reliant on one person? How strong and innovative is your management team? Are key employees properly compensated with appropriate incentives in place? Most buyers will place more weight and give higher value to businesses with strong management teams.
■ Revenue — Buyers love recurring revenue and contractual agreements. What is your customer attrition rate? Do you survey your customers and understand their level of satisfaction? Revenue is a secondary factor in determining the value of a business, but one with more cash flow will have a much higher valuation.
■ Diversification — Are your customers and suppliers diversified? If not, what can you do to improve upon this? If you are reliant on a key supplier, have you asked them what their contingency plan is in case of a business interruption? Businesses with a concentration on a single customer often experience substantial pricing pressure and significantly lower profit margins.
■ Industry — Is your industry growing? Is it facing potential regulatory changes? If your business is in an industry on the downturn, your valuation may be lower while businesses in a growing industry may see a higher valuation.
■ Growth — Is your business growing faster than the industry? If you have a business model with high growth potential, this could increase the value of the business. If your growth has slowed down, what is your plan to re-energize it? Mature industries still offer many opportunities if they can reinvigorate their sales.
■ Scalability — What is your company’s ability to meet increased demand? Does your business model allow for rapid growth? Are you operating at full capacity? A scalable business is one that focuses on the implementation of processes to create an efficient operation.
■ Reinvestment — Have you reinvested profits into the business? What kind of shape are your IT systems or equipment in? Would a new buyer come in and have to make major capital improvements? Value is not created just by maximizing returns on capital, but by putting an emphasis on investment for future growth.
■ Differentiation — What is your competitive advantage? How strong is your brand? Do you have intellectual property? Are you a low-cost provider? What can you do to maintain or improve upon your competitive advantage? Differentiation isn’t just beneficial for a business valuation, it’s critical for any successful business to be successful.
■ Profitability — Are you making money? How does your profitability compare to the industry? Buyers are focused on adjusted earnings before taxes, depreciation and amortization (EBITDA). Track unusual, non-recurring or discretionary expenses (i.e. things a new buyer would not need to incur in the future).
■ Due diligence — A buyer is going to want to go through your books and records and verify information. Have you prepared for this? There are steps you can take to ensure a smooth process before you decide to sell. Have you considered having audited financial statements? If not, have you considered having your financial systems and processes evaluated for improvements?
Understanding what drives the value of your business and implementing strategies to improve it will help ensure the best possible outcome when the time comes to exit. Your business is an investment. As such, you should be focused on having it ready for sale at any time. ●
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