Start Driving the Value of Your Business, or Someone Else Will Do it For You

According to a recent Pepperdine Private Capital Markets Report, under 10% of businesses estimated to be in the market to sell in the next 12 years will sell at or above their desired value. That means over 90% of those businesses will need to make significant price concessions or may not be ready to close a sale. This begs the question, why is there such a disparity between what owners feel their business is worth and what a potential buyer is willing to pay for it?

There are many drivers which impact business value. Often times, business owners place too much emphasis on historical profitability and cash flow measures and too little emphasis on other factors that significantly affect the value of a business in the eyes of the purchaser. One of the most overlooked factors is RISK and the role it plays in establishing estimates of value for the purchaser.

The primary purpose of purchase-side due diligence is to discover risk that does not expose itself in historical or projected financial information. The ultimate goal being to determine what is the risk of historical or projected cash flows not materializing in the future. The higher the risk the lower the value. Generally, eight fundamental business functions drive risk. Sales, marketing, people, operations, finance, and legal functions all present risk. Planning and leadership functions are overarching factors in addressing and mitigating risk. These are the primary drivers of business value. Unfortunately, these risks are often overlooked until it is too late or too close to a sale to positively impact them.

Industry specific EBITDA multiples tend to be tossed around in discussions of value as if they drive the determination of business value when those multiples really are just a common way to communicate the end result of a determined value based on many other factors. In effect, it is nothing more than a common language to facilitate discussion of value. Business owners have a tendency to gravitate to a multiple to define business value without factoring in the effect of risk on a potential purchasers checkbook.

Those serious about maximizing business value ideally should take action at least three to five years before an anticipated sale to capture the benefits of strengthening the eight fundamental business functions. Change is always hard and widespread change is even harder and less likely to occur without a detailed plan of action and the time and resources to execute it. This is a typical barrier between driving business value and accepting what purchasers are willing to pay.

One of my favorite quotes comes from Abraham Lincoln who said, “The best way to predict your future is to create it”. If your business value weighs heavy on your future plans, the most important thing for you to do today is to take control of it and drive it to where it needs to be for you to reach your ultimate goals.

Are you ready to take control and drive your business value? Contact Dennis Theis, CPA, CVGA, at 517.323.7500 or dtheis@manercpa.com for information on how you can reach your goals. Dennis is a Certified Value Growth Advisor with the experience to help maximize business value.