Sooner or later, business owners wonder what their company may be worth in the marketplace–or, in other words, what an able buyer might be willing to pay for it. What most don’t know is that business value is not a fixed, immutable number but it can actually be increased by taking some deliberate actions on the business over time.
Before we look at that in more detail, let’s start with how business value is calculated.
Don’t worry! I won’t go into the nitty-gritty of business valuation here. That has become a whole science and industry of its own.
To start with, it may be useful here to compare selling a home with selling a business.
When you are selling your home, there are some universally accepted elements that determine its value, for example:
Once these elements are taken into account, your realtor will likely show you some comparables in your area–houses currently on the market or houses that just sold and are very similar to yours.
And then you can quickly arrive at a fair selling price for your house.
Valuation of a business is in some ways similar and in some ways different from selling a piece of real estate. And I will draw some parallels further below.
To keep things as simple as possible, suffice it to say that the monetary value of a business tends to be calculated by multiplying a dollar amount with a multiplication factor.
The basic formula is:
$$$ X Multiplier = Business Value
The dollar amount in this equation typically is a form of business profit (net profit; Seller’s Discretionary Earnings [SDE]; or Earnings before Interest, Taxes, Depreciation, and Amortization [EBITDA]).
The multiplier is a much “softer” and less tangible element. That has a lot to do with the industry niche the business is in. In real estate, the parallel would be the location or neighborhood of your home.
But the multiplier can also be a measure of the overall quality of a business. To draw another comparison, when appraising your home, the qualitative factor may be, how well maintained the property is.
Fortunately, there is a quick way to get a pretty reliable estimate of value for your business, while also uncovering strategies for raising it.
Especially for business owners with little to no experience with business valuations, I like to recommend The Value Builder System as a starting point.
This system measures how sellable and valuable a business is, using a 100-point scale.
The Value Builder System is based on data of over 65,000 businesses. Sifting through all the data, It has identified a total of 8 areas that drive company value in any business. These 8 value drivers include financial as well as qualitative factors influencing the value of a business.
Not surprisingly, these 8 value drivers are areas that prospective buyers will look at closely.
Your history of generating revenue and profit, combined with the professionalism of your financial record keeping.
2. Growth Potential
Your likelihood to grow your business in the future and how fast you can grow it.
3. Switzerland Structure
Your dependence on any one employee, customer, or supplier.
4. Valuation Teeter Totter
Whether or not your business is a cash suck or a cash spigot.
5. Recurring Revenue
The portion and quality of recurring revenue you collect each month.
6. Monopoly Control
How well differentiated your business is from competitors in your industry.
7. Customer Satisfaction
The likelihood that your customers will re-purchase from you and also refer you
8. Hub & Spoke
How your business would perform if you were unexpectedly unable to work for a period of three months.
The exciting thing is, you can find out today how your business performs on a 100-point scale in each of these areas and what its estimated market value is. All you need to do is fill out the online Value Builder Questionnaire.
Knowledge is power!
Once you know how your business scores, you are in a position to take action and make meaningful changes that will raise the value of your business going forward.