For most small to mid-sized business (SMB) owners, their company is their most valuable asset. This dollar figure can have a big impact on them personally and professionally, both now and into the future, yet many business owners don’t really know what their company is worth.
Understanding the true value of any asset—and especially a business—can help the owner more effectively plan for their business and personal future. For example, business valuation comes into play with regards to business growth strategies, business capital structure, employee stock ownership plans (ESOPs), business continuity and succession planning, family ownership transfers, personal retirement, and estate planning.
Valuation factors
So, how can you, as a professional services provider working with SMBs, help your clients get a better understanding of what their company is worth? Well, for starters, you can advise them that NO one really knows exactly what their company is worth until there is a buyer. Therefore, having a motivated buyer, or multiple motivated buyers, is key to any successful exit.
That said, you can still help business owners estimate the value of their business for planning purposes. There is a fairly complex set of variables that is used to calculate a business’s valuation. Honestly, it’s more art than science. However, our cofounder, Bobby Martin, wrote a book called The Hockey Stick Principles that explains a good basic set of the factors that go into this calculation.
Revenue and earnings for comparable firms: How have closely related firms been performing?
Growth rates of revenue and profit: Firms that are growing 300 percent are generally going to be perceived as higher future value than those managing only 10 percent, but absolute size of revenue and profitability also factor in.
Scalability and profitability of the business model: Does this business model make money? What are the potential gross margins and operating margins? How expensive is it to service customers? Are there big economies of scale to be had?
Management experience and skill: This is a major consideration. Particular qualities experts value in management are that they have experience, are open-minded, and surround themselves with experts.
Intellectual property: How much intellectual property does the company own? Do they have any patents, trademarks, copyrights, or other assets that are difficult for others to reproduce?
Size and hotness of the market: What’s the potential size of the market? How many potential customers exist in this market, and how much would they pay? How many of all the potential markets have they actually sold to?
Propensity for being acquired: Is the firm the type that larger strategic buyers would be interested in acquiring? Can they name several large firms that would want to buy their company and have good reasons why it would make sense for them to do so? Have other firms in their market already been acquired?
Competitors: Having lots of competitors in their market could be a good thing for sale negotiations, albeit that’s mostly true if they have a big market to sell to. Competitors validate the worthiness of a company.
Competition from other buyers: If they are a hot commodity and have a large market plus management skills, several firms may be bidding higher and higher to invest in their firm.
Market conditions: Stock markets, the amount of money flowing into the economy, and the condition of the market to which they sell are all factors that impact how much a buyer will value a firm.
Financial modeling: Buyers leverage elaborate financial models to estimate the returns they might earn on a deal.
Researching valuation
If you’re feeling like those are a LOT of variables to try to analyze and compute (it is!), we have good news. Each of Vertical IQ’s 450+ Industry Profiles includes a Business Valuations chapter with data supplied by Business Valuation Resources (BVR), an online database with the most complete financial details on over 27,000 acquired private companies. It can be a great place to gather information on what other firms in your client’s industry are selling for.
You can print the Business Valuation chapter to discuss and explain the various valuation metrics with business owner-clients who are considering an ownership transition. You can also improve your presentations to prospects by including valuation metrics, which can lead to value-added discussions for exit strategies, ownership transitions, retirement planning, and more. Or better yet, if your client is serious about their valuation, they can go to BVResources.com and get detailed reports of sales for comparable firms.
Business owners should always consult with a qualified business appraiser, accountant, or mergers and acquisitions expert prior to selling their business, but sharing this type of business valuation information with them will not only provide important food for thought, it will help secure your place as a center of influence and trusted advisor.
>> Ready to learn more about the value of your client’s business? Visit Vertical IQ to get started for free today!