Show Me the Value
Last week we talked about how many business owners bury their heads in the sand when it comes to placing a value on their business. This week we focus on where the 'sweat equity' can make a positive difference in the valuation of your business.The markets and buyers of the world are as diverse as the businesses. This leaves each market and buyer with its own set of criteria and perspective of what value look like. Taking into account those diverse perspectives, this week we look at three core attributes that nearly all buyers are interested in paying top dollar to obtain: Growth, Cash Flow, and Systemization.
- Growth: Buyers want to see that a business is growing, preferably in a consistent and steady manner. Sudden spikes in growth can be a red flag for some buyers. It may cause buyers to believe that the growth was a fluke of the market or environment and not repeatable. Other buyers may be wary of a business that has severe peaks and valleys. This is not to say that the business won't have value, but it does decrease the size of the pool of buyers that will be interested in the business. Building a business that grows 5% year over year will have much more appeal than a business that spikes 15-20% growth in one year and then plateaus or declines.
- Cash Flow: This term has many names (Net Owner Benefit or Seller's Discretionary Earnings to name a couple), but it doesn't just mean the cash running through your business. When buyers look at the cash flow of a business, they look at the cash available within the business to be used by the owner. Strong, consistent cash flow tells buyers that they can afford to buy your business. More importantly, that same cash flow shows the bank that if they were to loan money to a buyer, there will be an acceptable cushion to cover the expenses of the business. Quality cash flow is important to the buyer, but a critical component to the bank.
- Systemization: As you have heard from us in the past, systems run the business and people run the systems. Not only does this make it easier for you to run the business, it creates a business that is not reliant upon you or any other employee to generate its product or service. This immediately creates a business of greater value to buyers. "Why is that," you ask? Because it takes the guess work out of transitioning into a business that is already successful. It decreases the training time for a new owner. It allows the buyer to own a business that doesn't require 90 hours per week of attention. A systemized business begins to produce a return on investment for the buyer on day one of ownership.
Ultimately, market conditions will determine what your business will sell for but the way you, as the business owner, influence those conditions is by creating a business of value.
How Much Is Your Business Worth