Whether you’re considering selling your business, or are just interested in knowing how to put a value on your investment, the evaluation process can often prove difficult.
There are a number of factors you might want to consider when evaluating your business’ net worth.
Your team, assets, processes and recurring revenue are key factors in evaluating your business when reviewed with the net earnings and cash flow. These key factors help to reduce the buyer’s risk and significantly increase the multiple used in the transaction and the total company value. Ultimately, the business is worth whatever the buyer thinks it’s worth, but you can estimate your value by looking at several different factors including the ones I’ve shared with you below:
Consider your team
When evaluating the value of your business, it is important to include the key employees and management team. Buyers generally require a strong management team to continue to run the business and are concerned with your own knowledge of the business — relationships, processes and ideas. They’ll question what the impact will be on the company if the owner is no longer operating the business.
Look at current business processes already in place
A business process is a set of steps or tasks that you and your team use repeatedly to create a product or service, reach a specific goal, or provide value to a customer or supplier. When processes work well, they can significantly improve efficiency, productivity, and customer satisfaction. This is an ongoing process, but ensure you have a plan in place to document all of your processes. This allows a buyer to see how you process your offerings and allows them to see what is involved in the operations of your business and can show your business is independent from you.
Assess the recurring revenues
Recurring revenue is predictable revenue that can be expected to continue in the future. It makes a company more stable and certain, both operationally and financially. Having recurring revenue as a portion of your total revenues lowers the risk associated with a company’s operations, and can help your company withstand a hiccup in sales. Establishing recurring revenue isn’t only good for business – it ensures you’ll get the maximum value when it comes time to sell.
Evaluate hard & soft assets
A company’s assets are an important factor to consider when determining value. There are hard assets, such as equipment, furniture, and inventory, and there are soft assets, such as patents, trademarks and software. Consider if all of your business’ assets are for sale or if you plan to include accounts receivable and inventory. Hard assets have value, which can be calculated by estimating the resale value of your equipment, furniture, and inventory. The value placed on soft assets such as patents, trademarks and software, can be a greater proportion of the total value of your business than is the value of tangible assets.
Evaluating your business properly is not a simple undertaking since it concerns several factors, many of which are hard to quantify. It is recommended that business owners looking to sell their business consult with an expert in order to reach a realistic estimated price, but the factors noted above will have a significant impact on the price a buyer will be willing to pay.
You are a successful business owner, a leader, a strong-minded individual with direction, but are you a visionary and if so, is that a good thing for your business?
“The ones who are crazy enough to think that they can change the world, are the ones that do.” – Steve Jobs
With strong words like this, it’s no wonder many business owners strive to be visionary leaders. But with over 30 years of expertise working directly with business owners, I can tell you it’s not the visionaries alone that make a business successful, it’s a combination of vision and planning. And these two valuable traits can be, but are not often found in just one person.
A visionary leader is: someone who focuses on the big ideas and end results, who can inspire his team to reach organizational goals. They are entrepreneurial in spirit and can easily jump from one priority to another when a new opportunity arises. Creativity, openness and persistence are their drivers.
A planner is: an action-based practical thinker. They focus on the processes behind any task, initiative, or goal. Their top priority is to figure out how the team is going to get things done. Their linear, process-driven approach shows in how they take all things into consideration before making a decision.
Both types are necessary when putting together a successful team, and recognizing what type of leader you are is the first step to making sure you have the right team to lead your business to success.
Which are you — a visionary leader or a planner?