By Andy Kocemba
Whether you are nearing the point of selling your company, or are in the early stages of building your business, from time to time you have probably wondered what it is worth. You might have even seen or used free online calculators that tell you the value of your company but thought, “How can they really know?” or “Can it really be that simple?” It really can be if you know the correct inputs for the formula. Here are the three main value drivers you need to be aware of:
- Profitability / Earnings (Cash is King!): The first thing anyone considering buying your business will look at is your profitability. Is your business making money? By and large, this is what buyers want, and the general value of your business is going to be based on a multiple of earnings. The higher the profitability, the higher the value of your business. Make sure your financials show the profits as well. It’s not uncommon for business owners to take profits from the company in many ways, just make sure the profits are all on the books and that you can clearly show a potential buyer where all the money goes.
- The Intangibles: Items like infrastructure, intellectual property, brand, and strategic fit can have a profound impact on how a buyer values your business as they impact the multiple a buyer will apply to earnings to determine value. Can the business run while the owner is away? Do you own a patented product? Are you the most established and reputable brand in the market? The more you can answer “yes” to questions like these, the higher the multiple a buyer will use. Conversely, as these items are absent, multiples decrease and values drop. As you become more aware of these items in your business, pay additional attention to how well they would transfer to a new owner. These are the things for which a buyer would pay a premium price.
- Real Estate, Inventory, & Cash: The market value of these three, plus any other balance sheet items that would transfer with the business, are added to the multiple of earnings value. These are assets that in and of themselves are not crucial to generation of earnings, and thus don’t factor in to the multiple of earnings component. They are simply additional assets being sold with the business.
Whether you are a business owner who will be selling your company in the next few years, or a business owner growing with an eye on the future, building upon and improving these distinct areas will directly increase the value of your company for the day you decide to sell.
Takeaways
- In order to know what your business is worth, you must know what goes into the valuation formula.
- Profitability is the first thing anyone will look at when determining the value of your business.
- Intangibles like having a business that can function while you are away and other balance sheet items also play a role in determining the value of your business.