21 Feb Around the Web: A Week in Summary
A recent article posted by Divestopedia entitled “Do You Know What Your Company Is Worth?” explains why it’s always good to know the value of your business. The first step is to consider what buyers will look for in your business, such as a diversified customer base, recurring revenue, high margins, and barriers to entry from competitors.
Regular business valuations can provide business owners with insight into their company and should become as routine as a financial audit. More specifically, periodic valuations give business owners a quantitative measure of the value created through the execution of a strategic plan, a better understanding of areas where they can drive value and increased credibility with potential investors.
Not only is it good to know the value of your business, but keeping track of it over time can help you improve and become an even better company.
A recent article written by zbt Certified Public Accounting & Consulting entitled “3 reasons why selling price isn’t necessarily a cash-equivalent value” gives three common reasons why selling price can be a misleading metric:
- Installment contracts: In certain situations, the buyer is making ongoing installment payments where interest is added on. Installment sales are common among small businesses when a controlling shareholder is buying out a minority shareholder, or when a shareholder is settling a divorce. There is more risk for the seller in these cases because there is a chance the buyer may not be able to make their installments.
- Earnouts: If a buyer is skeptical of the future earnings, they may hedge their risk with “earnout” payments where a buyer pays a lump sum down payment and then the remainder depends on the company’s future performance.
- Contractual agreements with sellers: Sometimes certain contracts between buyers and sellers are excluded from the selling prices that are reported in transaction databases. In other cases, pieces of the deal may be bundled together and therefore the valuation professional must allocate value to each component in order to get a good comparison.
Many times a “selling price” involves creative deal structures that require adjustments and this is where an experienced valuation professional can help.
A recent article from the CBB Blog entitled “Get out of town: Increase the value of your business” explains how the less involved an owner is in their business, the more attractive the business will be to potential buyers. A business with infrastructure guiding its growth and revenue-generating capacity is much more appealing than a business where one person is running everything.
One way to improve your business is to go on vacation so you can see where improvements need to be made while you’re gone. This will help to decrease owner dependency and increase business efficiency and value.
Getting away from the business is a good way for the owner to avoid creating a trap for themselves where they cannot be away from the business for too long and in the long run it makes exiting the business much smoother.