What’s your business worth? I’ll answer it for you in two parts

What’s your business worth?

Firstly, this only matters for 5.4% of all #businessowners since 94.6% of all business started fail to sell. They close at great cost to the business owner, their family, employees, the sector and industry they are in, customers and suppliers and the economy of the country they operate from.

The second part of the answer is “not nearly what I thought or hoped it would be worth” or “not enough in terms of what I need”.

Start now to prevent these fateful outcomes by taking control of two things. Understand how valuation of a business works and start building your business differently today to secure the valuation you want in the future. It can be done, and this is how.

    1. Understand your business

      The type of business you have, how long its been going, the historic performance and current investments you make in it, the maturity of the industry and sector you are playing in and the timing of a valuation all play a role. For example, a well-positioned business in the competitive marketplace with steady revenues earns higher valuations than a project revenue business.

    2. Understand your choices

      If you have lived through your business and have very different income statements, you will pay the price in valuation at the end. If you have run thin and held back on investments needed to sustain the growth in your business, it will be noticed and evaluated and hurt the final price. Build with a view to create an Asset of Value and your exit and price options will be vastly superior since smart money wants assets not promises nor potential.

    3. Understand your buyer

      How competitive is the market for your business? are there many buyehim a cool $280m.

    4. Understand valuation

      There a many methods of valuation. Let’s look at 3 common methods in this blog.

Discounted Free Cashflow (DCF)

This requires you to build a business into an asset. An asset is something that can be sold, that a buyer wants and wants it because it will provide two types of return. A capital return i.e. its equity value will grow and a cash return i.e. it will generate dividends. There are cases where certain assets only ever offer a capital return but that is seldom the case with a business as a living breathing thing. Capital returns are mostly for inanimate assets like art or diamonds etc.

There are essentially three levers that a business owner can control to improve the valuation of a business using the DCF.

The risk rate lever

A high-risk rate drops your valuation. The risk rate seeks to measure the risk the business carries. Essentially, it looks to understand what makes your business special. It measures this against competition mostly and how sustainable your business is. For example, if you think that what makes you special is your product or service or price, you’re in for a big surprise. 100 years ago, your product could have set you apart but today, your competitors mostly have something similar and if not, will have it in the very near future. However, if you have a patent, this might set you apart but mostly not. There are millions of patents and very few in the world of the SME have any true, sustainable product feature advantages. Today, what makes you special is mostly linked to the specialisation of your business measured in terms of the problems you solve for well-defined customer segments.

The duration lever

How long can the business continue without you – a year, five years, more? The longer into the future your business can operate the way it does, but without you, the higher the valuation. Get this right by building your business into a System of Delivery. That means your business functions are systematised to deliver a consistent experience in solving a problem for well defined customers. It links tightly to the point above. Your System of Delivery is the precept to getting a good team on board and these factors together reduce the demands and time the business places on you.

The free cash lever

How much free cash does the business produce now and into the future. The thicker the seam, the higher the value, The more diverse the seam, the higher the value. Getting this right need discipline. All your innovation and growth acceleration efforts need to align to the points above. This is where all these efforts need to be sure that you do not disrupt the organisation and efficiency you have developed in your System of Delivery. You want new growth to divorce itself away from operating overheads. The more they separate, the greater the free cash. Finally, you want to generate your growth across a spread of customer segments and sizes. Avoid having all your eggs in one basket – it’ll crash your valuation.

Nett Asset Value (NAV)

This is commonly known as your book value. It looks at the net asset value of your business. that is, all assets depreciated plus all other assets less all liabilities. In well-established business it’s a horrible number mostly because all assets have been written down. This valuation method often results in a net realisable value NRV valuation instead. This is the cash value of disposing of all the assets through, for example an auction and offsetting the liabilities from there. Its mostly a depressing valuation method since it looks at

Multiple of Revenue

This method is used and most useful in cash businesses but only if there are reliable benchmarks for that business. you apply a multiple on the revenues and then hope for the best. With good benchmarks of, say for example, a restaurant, you can evaluate the true worth of the business using the benchmarks. Food costs, rent, labour etc are well understood and even though the expenses are hard to calculate (it being a cash business) you can forecast the value from there.

  1. Understand your terms

    I’ll leave you with one thought. A JSE listed company, EOH went on a wild SME buying spree for about 6 years until a year ago. Their share price was growing and full of heat and they did deals that split the purchase price between shares and cash. Mostly shares. Sellers sold and got paid in some cases with up to 80% shares. At that time, the shares were valued at around R150. Today, they sit at R14.50. Say you sold your business for R30m on an 80% share split. At the time you got R6m cash and 160,000 EOH shares. Today, this means you sold your business for R8.32m!

Build with passion and purpose. Your purpose should be to build your business into an #AssetofValue. This will safeguard your future, put you in the minority of businesses that sell with success and get a premium value at that. At Aurik, we’ll work with you to get this done. Its what we do and love making your success our moments of pride!

Tags: Business Growth

Position your business for success and maximum impact
Positioning your Business Business Growth

Position your business for success and maximum impact

Wing Chun Kung Fu, a style of martial arts, requires that you have a secure footing on the ground in all its defensive and...

Read more

Building a business is like sailing a ship
Asset of Value Building your Business

Building a business is like sailing a ship

Analogies are very useful to simplify thinking and action. As a #businessowner, building a #business in a challenging environment...

Read more

What’s your business worth?
Business Growth

What’s your business worth?

Firstly, this only matters for 5.4% of all #businessowners since 94.6% of all business started fail to sell. They close at...

Read more

Creating wealth through your business
Business Growth Wealth Creation

Creating wealth through your business

Wealth describes an abundance of a desirable thing. It could be friendship, love, money, access to a foodstuff and so on....

Read more

Developing an effective marketing strategy
Business Growth Marketing strategy

Developing an effective marketing strategy

If you can’t and don’t get potential customers to know that you exist, they don’t care and you die. They don’t care because...

Read more

Build resilience into your business to take control of your future
Business Growth Strategic Planning

Build resilience into your business to take control of your future

We often hear about being resilient to thrive and survive in business today. Why does this matter and what does it mean?

Read more

Escaping the project revenue trap and why you should do it
Building your Business

Escaping the project revenue trap and why you should do it

Recently, at an Asset of Value event in Johannesburg, South Africa, a room bristling with 58 business owners that collectively...

Read more

What is your business building approach to 2019: Chose one of 3 strategies
The Money Show Business Strategy

What is your business building approach to 2019: Chose one of 3 strategies

2018 has been an exhausting year. Taking time off is important, so long as you don’t break the momentum of your business....

Read more

How to Deal with Nightmare Partnerships, Collaborations & Joint Ventures
The Money Show

How to Deal with Nightmare Partnerships, Collaborations & Joint Ventures

Collaboration is a key element for building your business into a successful Asset of Value. But, not every joint venture...

Read more

Why Collaboration is a Critical Skill for Every Business Owner
The Money Show Building your Business

Why Collaboration is a Critical Skill for Every Business Owner

We’ve entered the age of collaboration. Despite current events, like BREXIT, that showcase the opposite, collaboration remains...

Read more

Foresight and action can turn the potential sales you book in 2018 a certainty in 2019
The Money Show Sales

Foresight and action can turn the potential sales you book in 2018 a certainty in 2019

You’re winding down towards the end of 2018, and preparing to lock and load the early sales for 2019. If you’re not in this...

Read more

Turn 2018’s Exhaustion into 2019’s Business Acceleration
The Money Show Business Growth

Turn 2018’s Exhaustion into 2019’s Business Acceleration

Year-end fatigue is setting in - 2018 has been a tough year emotionally, economically, and physically. But that’s not much...

Read more

Building a Branch Network for Your Business
The Money Show Asset of Value Business Growth

Building a Branch Network for Your Business

Building a branch network for your business is still relevant and appropriate, despite the exponential growth opportunities...

Read more

Growing Revenues through Indirect Sales Channels
The Money Show Business Growth Sales channels

Growing Revenues through Indirect Sales Channels

Effectively growing your business revenue needs a lot more than just a regular sales effort. Developing and implementing...

Read more

Entering, Surviving, and Thriving, in a New Industry Created by New Technologies
The Money Show Business Growth Strategic Planning

Entering, Surviving, and Thriving, in a New Industry Created by New Technologies

We’re in the midst of the 4th industrial revolution, with many new technologies quickly entering the business environment....

Read more

Business Funding: How to Self-Fund your Business through its Lifecycle
The Money Show Business funding

Business Funding: How to Self-Fund your Business through its Lifecycle

Business owners and entrepreneurs often express the difficulty of accessing business funding as a key challenge. And yet,...

Read more

Building a business with confidence amidst uncertainty
The Money Show Business Growth Business owner

Building a business with confidence amidst uncertainty

A constantly changing business environment demands that business owners develop new skills to ensure business growth. Recently,...

Read more

Choose your Business Growth Rate and Build your Business Towards It
The Money Show Business Growth

Choose your Business Growth Rate and Build your Business Towards It

We may be living in a negative economic cycle right now, but it’s up to you to decide what your business growth rate should...

Read more

How to Build your Business & Capitalise on a Seemingly Negative Business Environment
The Money Show Building your Business

How to Build your Business & Capitalise on a Seemingly Negative Business Environment

The reality of a recession is sinking in, and it seems the echo chamber of negativity is overwhelming. South Africa’s business...

Read more

How to build a resilient business in a technical recession
Building your Business

How to build a resilient business in a technical recession

Our economy is in the midst of a technical recession and business owners are wondering how to weather this economic storm....

Read more

Marketing for Business Growth: Keeping your Customer Acquisition Cost in check
The Money Show Business Growth

Marketing for Business Growth: Keeping your Customer Acquisition Cost in check

You’re not alone. It’s becoming more and more difficult to generate leads, turn those into customers, and grow your revenue....

Read more

Product businesses in the industrial sector need to build differently to survive and thrive
Building your Business Business Growth

Product businesses in the industrial sector need to build differently to survive and thrive

Keeping water flowing through the kilometres of underground pipes keeps all players in water infrastructure awake at night,...

Read more

How to Build Your Business by recruiting the Right People to do the Right Thing at the Right Time.
The Money Show Building your Business

How to Build Your Business by recruiting the Right People to do the Right Thing at the Right Time.

As a small business owner, your biggest investment will be your staff. How you hire, who you hire, and when you hire, will...

Read more

Turning the talk of your Business Strategy into the Walk of Execution and Results
The Money Show Business Strategy

Turning the talk of your Business Strategy into the Walk of Execution and Results

In recent meetings with frustrated business owners, Pavlo Phitidis picked up on a significant trend – a high level of complaints...

Read more