There are 4 million businesses currently owned by baby boomers. In the next 5-10 years, most of these businesses will change hands through: a sale, auction, liquidation, or just closing. Which one of these activities do you think will bring the most money to the business owner based on the value of your business? If you guessed selling, then you are correct! Getting someone else to purchase what you have will bring you the most money. An auction, liquidation or just closing the doors doesn’t bring in much money. Knowing the best way to accomplish this is critical to the security of your future.
Since most business owners have the majority of their net worth tied up in the value of their business, it is CRITICAL to increase that value and make it the most appealing to future purchasers. What is the best approach to achieve maximum value for your business? Keep reading to find out the specific tasks you can employ to increase the value of your business.
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How to Increase the Value of Your Business:
Know your EBIDTA. This is earnings before interest, depreciation, taxes and amortization – the cash flow your business generates. Growing this number has a 3-6 multiple when you go to sell your business. This is the one thing you can do to increase the money you get when you sell.
Track your trends.
- Overall revenue trends (5 years) need to be on an upward trend.
- Gross profit margins need to be consistent or improving.
- G&A/Overhead costs need to be consistent or growing slower than revenue.
- Profit needs to be consistently improving (as a % of revenue).
- For example, businesses with a 7% net profit in 2013, then 8% in 2014 and 9% in 2015 will be much more valuable than a business with a 7%, 6% and 5% net profit percentage over the last 3 years.
Define monthly goals for revenue, margins, operating expenses and profit. Your business profit performance will dramatically improve if you do just this one thing. More on this key ingredient at the bottom of this blog.
Make money and pay off debt. The less you owe to third parties, the more money you will put in your pocket when a sale is finalized.
Understand how the value of your business is determined. Over 75% of business owners don’t have a good understanding of how a business is valued.
- Here is a quick way to determine value – Take your business’s total capital and add 4 X your business’s last three years’ average EBIDTA. Example: if EBIDTA for 2013 was $400,000, 2014 was $450,000 and 2015 it was $500,000 the average would be $450,000. That number will be multiplied by 3-6X and added to the capital of your business. Let’s assume the company has capital of $500,000 (assets of $2M, liabilities of $1.5M). Using a 4X multiple of EBIDTA, the business would have an estimated value of $500k (capital) plus $1,800k (4X $450,000) for a total value of $2.3M. A real valuation is much more complex than this simple example, but this will get you close to what your business is worth.
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A final thought. In 2015, my group of clients improved their net profit by 25% over 2014. For example, if profit for the group was $100,000 (it was closer to $5M) then 2015 would be $125,000. This was accomplished by each of them having a revenue, margin, expense and profit goals for every month of 2014. These goals were communicated throughout their organizations, and every key employee knew what the targets were. The next step was to measure against the plan each month and determine what was working and what wasn’t, and then take steps to get the department and/or company back into compliance (solve the problem creating the deficiency). Focus and accountability brings improved profit. I can show you hundreds of examples where this has improved profits dramatically for every company. Focus and accountability WORKS!
The Prophet of Profit
P.S. Want to know more about developing key standards and improving profit in your business, contact me for a short conversation on what to do next.