The Importance Of An Up-To-Date Business Valuation

November 2018

How can you go forward with an Exit or Transition Plan without knowing the value of your business? To the majority of Baby Boomers Business Owners, the value of their enterprise represents 70-80% of their net worth. Let me ask; from where is that number coming? In far too many cases; it is what a friend or a buddy at your golf course told you; or maybe what you heard a competitor went for. So-called industry “Rules of Thumb” can be both vague and dangerous.

Every business is different, with its own strengths and weaknesses. How deep is the bench? How much recurring revenue does the business generate? These things have a huge impact on the value of your business. You need a professionally prepared valuation to know just what you have and what you can count on going forward. Here is the problem: 80% of you have a financial gap. This Gap is the spread between what you have (the value of your business, savings and retirement) and what that will yield as compared to what cash flow you will require in your post exit life. This Gap needs to be addressed immediately!

Value is driven by EBITDA (earnings before interest, taxes, depreciation and amortization) and a Cap rate or Multiple. This value needs to be defensible in the potential buyer’s eye, which focus on the cash flow of your entity.

So what do you need to do? Here are a few things: clean up your day to day operations and scrub down the income statement; revisit your SOP’s, increase your recurring revenue stream and strengthen the relationship with key employees. Always ask yourself; would I buy this business? Understand how digital accelerators, lead magnets, funnels and digital marketing impact your industry. Be sure the SIC on your business tax returns is accurate. The wrong code can negatively impact your Cap Rate.

Cost out your product or service as if you were just starting out. You need to see if you are still making what you thought you were making. For many companies this shrinking gross profit margin has been hidden by our recent robust economy and increased sales.

What is happening in your industry? How is it changing? Are you positioned to handle this change? Understand that your company needs to be profitable (sounds obvious), sustainable and transferable to even consider an external sale.

Do you have depth in your management team? Do you have a strong bench that is ready to slide in and step up? What is your customer or client concentration and how dependent is your business on you?

Take our confidential twenty question Owner Readiness Survey here:

This survey may help you answer some of these questions.

Best regards,
Eric Bratt
Business Legacy Strategies