Business value is the primary long-term goal of every business.
However, many owners in reality may only have “lifestyle” businesses. These are businesses which sustain a reasonable amount of income for the owner’s lifestyle at the expense of building long-term value for the company.
With about 80 to 90 percent of a business owner’s personal wealth generally tied up in his or her business, focusing on building value and income may attract buyers who want to pay you someday for your business.
There are reasons why this is important.
First, you will eventually exit from your business.
Yes, it will happen even to you. It’s just a matter of when and by whose design – yours or someone else’s.
So, let’s embrace it, and consider some of these questions:
<Who will replace me and when?
<How much money will I need?
<Will I be able to get the money I want?
<When will I know the best time to exit?
CONTROL WHAT YOU CAN
Assess your strengths and weaknesses around your intangible assets to start building value. Here are six areas to strive to operate efficiently and effectively:
<Business efficiencies – improving procedures and processes.
<Improving talent – right people in the right seats.
<Improving customer delivery systems – customer experience.
<Improving social operating systems – brand and culture.
<Training and education.
By further defining these knowledge-based capital assets, you can begin to measure them. All are within your control:
<Human – value of your talent.
<Structural – value of systems and intellectual property.
<Customer – value of customer relationships.
<Social – value of your brand and culture.
FORMULA FOR VALUE
It’s important to understand the range of values for your industry and company.
Most private buyers of businesses look at two key components to determine value.
<EBITDA – Earnings before interest payments, tax payments, depreciation and amortization – or operational profitability.
<Multiple – A multiplier determined by the private capital markets.
Then, value is determined by multiplying EBITDA by the multiplier.
INFLUENCING THE MULTIPLE
Multiples generally are listed as a range of numbers for any given industry as well as company. Achieving the highest possible multiple may result in achieving a higher than average value for your company.
Multiples can be influenced by many factors, including cost of capital, terms of the deal, structure of your business and your choice of exit option.
In addition, prospective buyers will take the multiple up or down depending on the state of the economy and your industry.
The average starting point for multiples may be 3-5. However some industries in general and some businesses specifically may command a multiple well in excess of this range, while others may receive offers at multiples below 3.
IMPACT OF THE MULTIPLE
The different multiples have a significant impact on your business value.
For example, a business with EBITDA of $1 million could trade at a multiple of 4 which equates to $4 million.
Yet another business in the same industry could trade at a multiple of 7 or $7 million, which is 75 percent greater.
You can control where you land in the range. Your company’s multiple will depend on the strength of your intellectual capital.
If you truly want to land in the higher range of multiples, take stock of your company’s knowledge-based capital.
Score your company from 1 to 10 (10 being the best) for your industry in the capital assets of human, structural, customer and social.
Decide to take action one step at a time in each area where you score less than 7.
At the end of 90 days, score yourself again. If you score 7 or above in any of these categories, move on to the next category.
Once you reach a score of 7 or higher in each category, you are well on your way to moving your company’s multiple toward the high end of the range of multiples.
And the result may be a higher value for your largest investment.
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.