It’s all about value.
To build a valuable company, it is helpful to identify its value today and its potential value in the future.
Doing so has other benefits, too:
<Focusing on value makes exit timing irrelevant. (You will always be ready.)
<It acts as a catalyst to drive organizational behavior.
<It gets employees thinking more like owners.
<It can be used as a benchmark to measure existing and future performance.
<It’s also a benchmark in that 60 to 90 percent of your net worth may be tied up in your business.
Have your business professionally valued at least annually.
The first time may require a little extra effort and expense. However in future years, to keep score, you can simply update your most recent year’s financial statements.
In conjunction with the business valuation, complete a comprehensive personal, financial and business assessment.
Completing these two steps will give you clarity about your business that previously was not self-evident.
RANGE OF VALUES
Seldom are a business owner’s expectations of business value based on reliable information.
All businesses trade in a range of values. Where you place in that range of values may be based on three factors:
<The results of your financial analysis of value and benchmarking of your business.
<Your attractiveness score.
<Your readiness score.
Certified Public Accountants and certified valuation experts understand there are different reasons for valuing a business.
One reason may be for a sale between family members, another for an estate gift transfer. Some valuations are purely for tax reasons and others for a sale to a third party.
Here, we focus on the strategic value of the business if it were to go to market and be sold to a third party.
Knowing what your business is worth today sets the baseline. As part of this valuation exercise, you need to know the business’ potential strategic value.
Ultimately, your goal is to close the gap between what your business is valued at today and its potential value if it were considered best in class.
REAL NUMBER VS. TAX NUMBER
Most privately held businesses try to minimize their income taxes and manage their company’s cash flow with this goal in mind. This leads to the cash flow “tax number.”
The “real number” is the actual cash flow your business produces on an annual basis. It’s rare for the business owner to know this number really well.
Another way of referring to the real number is the normalized cash flow expressed as EBITDA, or earnings before interest, taxes, depreciation and amortization. Generally, EBITDA is accepted as the best number to use to express the cash flow being generated in your business.
Combining the EBITDA with an assumed multiplier determines what a willing buyer is going to pay a willing seller for fair market value – the business value today.
CONCENTRATE ON MULTIPLIER, TOO
Most business owners and their advisers focus on managing only EBITDA. However, focusing on both the EBITDA and what contributes to the multiplier can lead to accelerating the value of your business.
It is this process of value acceleration that may lead to closing the gap on what you expect your business to be worth vs. what it could be worth.
And the businesses that operate efficiently and effectively may receive the highest valuations based on higher multiples.
The starting point for increasing the value of your company is first to identify what constitutes value and then correlate it to your personal, financial and business assessment. The entire process is called the master plan.
Based in South Whitehall Township, Jan Graybill is a Certified Exit Planning Advisor and managing partner of Legacy Planning Partners, a company he founded in 1999. For 37 years, he has made business owner transition planning the focus of his client practice. He can be reached at email@example.com.