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How your Accountant thinks in respect to your Company’s worth…
Knowing what your business is worth is huge. Knowing why it is worth what it is, and knowing how to make it worth more
to a buyer is even a bigger “thing”.
By Rick McDonald
Your “value” is based on your “normalized” cash flow (oftentimes referred to as EBITDA).
Value is EBITDA times some numerical factor reflecting risk to that cash flow. Many accountants look at something called a “capitalization rate”. That essentially is a number based around your industry (SIC Code), growth rate, size, and current interest rates.
Great. But what does it really mean?
It’s like selling your house. A realtor can give you an assumed valuation based upon market conditions but in the end, what you really need to know is What do you need to do to improve the amount of money you will get at the sale?
For a home, it’s staging it. For a business, it is improving on the components of your Multiple.
It’s fine to know what you are worth, but knowing how to get the business in shape for sale is what really matters!
So what you need to know is what is your Multiple. It essentially is this same as a “capitalization rate” but from a “pragmatic” world, not the “accountant” world. What is the number used by a Buyer to apply against your EBITDA?
And how do you measure up in the factors that comprise this Multiple?
Let’s look at the 7 key components of what makes up a “Multiple”:
1. Owner Irrelevancy - how much does the business rely upon the Owner?
2. Stay Bonuses - how incentivized are key EE’s to stay after the owner has departed?
3. SOPs - is there a well-documented Standard Operating Procedure for all parts of running the business, laid out so as to be easily digested, along with regular training and EE development programs?
4. Deep Bench - how good is your team and how easily replaceable is any one member?
5. Recurring Revenue - how much of your revenue is based upon repeat, recurring sales?
6. Automating Sales and Customer Service Technology - do you use industry-specific tools to automate sales, operations, and customer service to improve efficiencies and collect better data?
7. Margin Management and Financial Data Management - how do your Gross and Net margins compare to peers, and how good is your financial reporting?
If you scored each of these components and weighted the scores based upon statistically significant impactfulness, you could arrive at a “Multiple”. More importantly, that Multiple is measurable and capable of being broken down by component, where you can see just where you need work to improve on the multiple, thus vastly improving on the valuation of your business.
Both methods, the capitalization method, and the due diligence behind scoring each of the 7 key components will arrive at a Multiple to be used on EBITDA and arrive at a valuation.
While capitalization rates are an important tool, understanding the “scoring” of your key components that comprise the Multiple are a far more useful tool in managing the goal of increasing the valuation of the business and getting it ready for sale.
At Exit, we use our custom algorithms behind our Exit Valuation Survey to score each of the 7 key components of a Multiple and derive the actual Multiple by seeing the sum of the results.
We also use one of the largest software companies in the industry to back-test our Multiple with the capitalization rate.
Only by doing this can we develop a plan of action designed to improve the valuation of the business and prepare it (properly) for sale. The survey takes less than ten minutes to complete, why don't you start now?
How It Works
It's time to face the truth. If you don't plan your exit correctly, you could end up working until you die. Your journey to a successful sale and increasing the value of your business by 30-50% starts with taking our Exit Valuation Survey. This tells us exactly where you are now, the exact performance of your business, and what you need to do to improve. You can access your buyer Risk Report and speak to our analyst team on a complimentary call to discuss your results, increasing value and exit options.
TAKE THE SURVEY
Discover how your business scores in
the 7 key drivers of valuation
ACCESS RESULTS & ANALYST
Understand the risks a buyer sees
when valuing your specific business
INCREASE BUSINESS VALUE
Implement the "7 Pillars Of Value Creation" and increase your business value
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*The Lower Middle Market is comprised of businesses worth $5-$30 million, typically having EBITDA of $1 million - $4 million.
The 7 Pillars of Value Creation is our name for our work as Business brokerage services and related consulting pertaining to business sales, mergers, acquisitions and business valuation. Exit The Family Business the downloadable guide and any accompanying assets or affiliates are provided for informational and educational purposes only. It is not intended to provide tax, accounting or legal advice, nor is it an offer or solicitation to buy or sell, an endorsement or sponsorship of any company, security or fund. Certain owners, officers or affiliates may be associated with investment firms and may make referrals from time to time for such services, but this does not constitute investment advice, nor should it be construed as Exit The Family Business being in that business. We always suggest you seek professional advice. Past results are not a guarantee of future results.