This presentation outlines basic information used to value a business and identifies the 4 points of Sellability that can be used to increase the businesses value.
Understand and maximize the Value of your Business.
1. Understand and Maximize the Value of Your Business Rodney Wolfe, CMA, CCIM, BCI Principal/Broker Murphy Business & Financial of Southwest Idaho, LLC 1 David C. Smith Managing Partner Valens Point, LLC
2. What we will cover: Basics of business valuation and importance for long-term wealth What are the areas of your business that can be managed to increase value and marketability 2 Understand and Maximize the Value of Your Business Income or Wealth?
3. Understand and Maximize the Value of Your Business Objectives Business Market Overview Understand Valuation Examine Usefulness of Valuation Determine ways to Maximize Business Value 3 Are you building wealth or generating an income?
17. Valuation for Purposes of Sale Most small businesses are sold on the strength of cash flows -- not assets. The Market Method is the most effective way of valuing a small business. Problem: How can you find out these values to maximize the price of your business? Solution: Hire experts. Good valuation knowledge better gauges value, provides benchmarks for business improvement, and supports sale negotiations.
18. How are they valued? Owners Discretionary Cash Flow (ODCF): The amount of money the owner can take out of the business annually Net Income before taxes PLUS Owner’s salary Depreciation/amortization Interest expense Non-recurring expenses Owner perks (personal travel, auto, health insurance, etc.) It’s important to establish a benchmark. You manage what you measure!
19. Current Market Valuation Example Multiples of Discretionary Earnings 3.3 2.8 2.1 2.3 Distribution Manufacturing Retail Service
20. Risks of Using Rules of Thumb Do these two Companies Deserve Equal Market Value?
21. Justification of Value 11 *ODCF must provide the owner with a reasonable salary, provide a reasonable rate of return on the buyer's investment, provide for annual capital expense, and cover debt service with a reasonable debt coverage ratio or the business is overvalued.
22. Understand and Maximize the Value of Your Business How would you view the two businesses? Financial data only? Owner Lifestyle? Situation of the business? Ability to continue in business? Most Owner’s have an inflated expectation of value 12 Knowledge of the business value allows for better strategic planning and action (Sellability) - what gets measured gets managed!
23. 13 Sellability Growth Profit- ability Focus on the areas of your business that make it successful and will make it attractive to potential business buyers. Manage and operate your business like you will leave it in the future! Sellability Sustain-ability Risk
24. Sellability: Growth 14 Growth Demonstrated revenue, profit, customer and offering growth over period of time (i.e. 2 – 3 Years). Successful financial picture is attractive to external viewers. Action: Identify strategic areas of growth (i.e. acquiring new customers, complimentary products / services) Profit- ability Sustain-ability Risk
25. 15 Sellability: Profitability Profitability Planned and achieved profitability: customer, product, location, employee. Profitability is key to increased valuation and demonstrates solid management and performance. Action: Create and manage the systems in your business that produce consistent results and increase effectiveness. Growth Sustain-ability Risk
26. Sellability: Sustainability Key systems and the and ability to transfer of customers, contract, and key management/employees. Sustainability is critical to sustained successand helps owner achieve ROI. Action: Identify and implement key systems. Ensure business assets can transfer to new owner. Growth Profit- ability Sustainability Risk 16
27. 17 Sellability: Risk Identification and mitigation of risk. Risk mitigation demonstrates sound management and increases probability of success. This builds confidence. Action: Review financial, legal, environment, competitive, and industry risk and implement mitigation plans. Growth Profit- ability Sustainability Risk
28. 18 Takeaways Questions to consider Are you building wealth or generating an income? Do you know the value of your business? What management decisions would you make if you knew the value? What is your business exit strategy? Actions Understand your businesses value. Set long term goals for your performance, business value, and transition plans. Implement a management strategy that reflects wealth creation.
29. 19 Questions? Thank You! David C. Smith Managing Partner Valens Point, LLC Rodney Wolfe, CMA, CCIM, BCI Principal/Broker Murphy Business & Financial of Southwest Idaho, LLC
Editor's Notes
The majority of business owners do not know the value of their business, likely the largest asset they own. This presentation will explain the basics of business valuation and its importance for long-term wealth development. Business Owners will learn the areas of their business that can be managed to increase value and marketability. Key Point: Start with the end in mind.