For new (or established) business owners who are interested in determining “What is my Business Worth?”, this month’s ‘Breakfast at the BAC’ was enlightening. This series is geared toward small business owners in Fort Worth and was co-created by the Business Assistance Center and the Fort Worth Chamber. Toby Cotton from Whitley Penn, Layne Kasper with Kasper & Associates and Robert Allen with J. Taylor & Associates served as panelists offering advice on understanding the value of your business and how that may affect the sale of your business.
Beyond your exit strategy, what is the benefit of knowing the value of your business? How do you determine the value of partial ownership or how your intangible assets are worth? These and other topics were discussed.
Basic Reasons to Know the Value of your Business
- Reporting to the IRS
- Planning to Sell
- Generational Transfer of a Family Business
- Seeking Business Financing
- Involved in a Lawsuit
- Divorce Buyout
Value Drivers – understanding what factors drive the value of the business can be crucial to the long term success of the business. Although the valuation process usually requires a few (2-3) years of stable financial history first, it important to understand what factors (other than revenue) are key for your business so that you can focus on them. These may be factors such as reputation, a solid, sustainable management team or a long-term lease below market value that can increase the value of your business while there may be other factors such your entire operation depends heavily on one person that prevent your business from gaining as much value as possible.
Two main ways to increase the value of your company:
- Maximize Assets both tangible and intangible – Factors like great workplace culture, clean, well-maintained appearance of the physical grounds, solid reputation in the community can affect the valuation (EBITD) multiple.
- Minimize Risk – for example if you have key employees, consider contractually obligating them to come to work every day.
Owner Salary – tax value vs. business value – Whether the owner is paid is a big factor here. The owner may choose to only draw a salary when there is cash available to do so. This may result in a positive balance sheet, however when valuing the business, an adjustment will be made as if the owner draws a regular salary based on fair market compensation for his or her position. This may mean the business is actually showing a loss.
Factors that make your business appear more attractive to potential buyers
- Clean, reliable financial statements created by a reputable 3rd party CPA firm. Having your financial statements, such as an accounts receivable or inventory report on hand and readily accessible will give you more credibility with a buyer.
- 3rd party verification of other significant factors of the business, for example if inventory is a big driver of the value of your business, 3rd party verification has value.
- Budget / Forecast – a potential buyer wants to understand what the expectation of performance in the future will be. Consistently creating a budget each year, over time, will enhance your ability to predict the future performance of the business.
- Ownership of a noted brand or proprietary product reduces the risk to the buyer.
People / Key Employees are the most difficult asset to value. Simply calculating the cost of replacement many times does not completely represent the total value certain employees brings to the overall company culture and way of doing business. If you translate your income or cash flow, then attribute as much of that cash flow to specific areas of the business, what is left over is referred to as Good Will. Good Will is usually thought of as a combination of the company’s internal culture and reputation in the community. Both of these should be cultivated in such a way that they are sustainable beyond the sale of the company in order to truly have value.
Understanding the key factors specific to your business on which you should focus on moving forward will inform the areas in which you should focus your energy today to increase the value of your business tomorrow.
Interested in learning more about Business Valuation?