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How valuable is your business?
As part of our client webinar series, we invited Nigel Kavanagh, a senior manager in accountancy and business advisory firm Crowe, to speak about the interesting topic of Building Value In Your Business.
Here we summarise the main points of Nigel’s presentation.
What is business value?
When forming a new company, the value of a business is often thought to mean increasing your business’ margin and turnover. However, business value is generated by creating a strong, sustainable and scalable business. This is often down to how you operate your systems, how your business is run and the personnel involved in the business. Often, with some straightforward changes within your business you can fundamentally increase this value.
What is a valuable business?
A valuable business can either be;
A business that a buyer feels will make a profit on their investment.
A business that the owner can expect to generate a long term income for them.
What makes a company valuable?
What makes a business valuable for a buyer is usually the same as what make a business valuable for a business owner. Therefore, when you are valuing your business it may be best to imagine you are attempting to buy your business.
What makes your company valuable are the requirements a potential buyer will look for in your business. These requirements are often;
- Whether your business is profitable.
- Whether the business has recurring revenue or has a predictable level of earnings.
- If the company is scalable.
- Whether the company is defendable, i.e. can somebody take what your business has done and replicate it?
- The business’ independence from the owner’s day-to-day involvement.
Why is the business’ independence from the owner important?
Avoid the owner’s trap!! If a business is too reliable on their owner, the business could easily collapse once the owner leaves. A buyer will avoid businesses who rely heavily on their owner as it is a major risk. Whereas, a business which is independent of its owner decreases risk and will therefore increase value.
What does not create value?
The most common elements that will devalue a company for a buyer are;
- One-off opportunist profit. This is outside the core element of your business, it is an opportunity, and therefore will not heighten your value.
- If a business is too reliant on a supplier, customer, an employee or the owner. This can heighten the business’ vulnerability and will not heighten value.
- The owner is heavily involved in the day-to-day running of the business.
- Customised solutions: It is more difficult to scale up your business due to the skilled staff and vast knowledge necessary to scale up.
How can I value my business?
For a simple valuation of your business, ask yourself the following questions;
- What Are You Really Good At?
- What is the USP (unique selling point) of your business and how can you utilise this?
- Can You Sell More Of It?
- Are there inhibitors to sell more? I.e. Do you need staff with a specific skill to sell more?
- Can You Turn This Into A Repeatable Process?
- Is the business scalable? Are there growth prospects?
- Can you depend on certain aspects of your company to be profitable each month?
- Is there a new good/service/plan your business can produce to heighten profitability and predictability?
After you answer these questions and understand your businesses value, you can then proceed to mathematically value your business.
To do this you will firstly need to know your Earnings Before Depreciation, your Interest, your Taxes and your Amortization, this refers to payments that have been spread over multiple periods. Once these are known, you can proceed with the value equation;
A multiplier, which is typically based on the inner workings of your business, the process of the business and the potential of this business to expand its scalability, how easy it is to manage and maintain, etc.
(EBITDA x Multiplier) + Surplus Assets
The aim of this equation is to increase both your profits and the multiplier.
Nigel showed us how by focusing on doing what we are best at (or what is most profitable) and multiplying this factor, we can increase the value of our business.