Increasing Value of Business
Price is what you pay. Value is what you get.
Warren Buffett
We know that many business owners view their business as their retirement fund or at least want to get a 'lump sum' from the business. The investment of many years of your life is locked up in the business and we can help you make sure that you maximise the return on that investment.
We do it by using the proven processes developed in our Entrepreneur Cultivator™
A key element in your succession plan is ensuring that the value of your business is maximised when you're ready to sell. This takes time; it cannot be done overnight and it cannot be done without proper planning.
There are many ways to value a business, most are based on some measurement of past profit and a determination of what that profit is worth in 'today's pounds'. Most business valuations involve an assessment of:
- the industry in which the business operates
- the business risks and future prospects
- the profitability, cash flow and financial position of the business.
The most commonly used valuation methodologies are:
- liquidation or net realisable value
- discounted cash flow (net present value of projected future cash flows)
- capitalisation of future maintainable earnings
- investment value
Liquidation or Net Realisable Value
This method of valuation is based on what price could be achieved if all of the business's assets were to be sold. For businesses that are planning to continue, this method simply provides an indication of 'minimum value' since it does not take into account any of the business's actual or potential earnings. As a benchmark, the assets employed in a business should generate more in earnings and cash flows than they would if they were to be sold.
Discounted Cash Flow
This method of valuation seeks to calculate the present day value of the business's projected future net cash flows. It requires an analysis of future cash flows, capital structure, the costs of capital and an assessment of the value of the business at the end of the forecast period. Forecasts, by their nature, are inherently uncertain as they are necessarily based on assumptions, many of which are beyond the control of the business and/or its management. The actual future results may be very different to those forecasted, and as a result this method is not popular, although it is often used to estimate the value of start-up businesses.
Capitalisation of Future Maintainable Earnings
This method determines a valuation range based on the capitalisation of future maintainable earnings. It is appropriate for businesses that:
- are a going concern
- have been in existence for a number of years
- are not undergoing any significant transformation
- have historically stable profitability
- are not likely to experience significant growth or decline
- have products that do not face technological obsolescence.
Investment Value
On occasion a buyer that believes they will enjoy post purchase economies of scale, synergies or strategic advantages by combining the purchased business with their current business, will place an 'investment value' on the business which differs from 'fair market value'. Investment value is based on the specific value of a business to a particular buyer.
As you can see many of these valuation techniques are largely based on profit, and we will work with you to improve your profits.
We do this by identifying methods of increasing 'premium' or 'volume', and second, by strategically managing growth, capacity and risk.
Businesses that take a strategic approach to managing their capacity (that is, how much business they can do, with what types of clients, using what mixture of resources) and growth are typically more profitable over the longer term.
We also work with you to ensure you have the best people in the right jobs so each person is doing what they are best at. This means they are happier more motivated and more effective and successful.