Building the Value of a Business

The value of a business is largely a function of its profits, with certain things added back in to what are accounting profits to make up a number that is called the Seller Discretionary Earnings (SDE).

The things added back in are expenses that are incurred by the present owner that wouldn't necessarily be incurred by a new owner, such as travel expenses, interest, personal auto expenses, etc. Also added back are "non cash expenses" like drepciation which reduce paper profits but aren't really amounts lost to the owner.

Once the SDE is determined, then a mulitple is applied to that number to come up with a value for the business. Usually the multiplier for a small business is somewhere between 1 and 5, with most businesses coming in around 2.

If it were just this simple, however, everyone would know exactly what any business was worth and a one man tailor shop having a good year might be worth the same as a fifteen person machine shop having a bad year, whcih is not usually the case.

So, what else goes into the value equation, and of those things, which are ones that a business owner can directly control to raise the overall value of their business?

There are many, but some of the key things that bring the value toward the high end of the multiple are:

  • Absentee owner is worth more than an owner operator business
  • Recurring revenue is worth more than non recurring sales
  • Asset heavy businesses are worth more than little or no asset businesses
  • Diversified customer base is worth more than a few big customers
  • The longer you've been in business, the more the business is worth
  • Consistent growth in sales and consistent profit margins are worth more
  • Income that is verifable and has been reported on tax returns is worth a lot more
  • Being in a growing industry is worth more than a stable or declining industry
  • Having a solid and proven marketing plan in place is worht more
  • Not being dependent on the owner or a key employee for sales is better
  • Having an operations manual and well documented system for running things is valuable
  • and so on...

Obviously many of these things cannot be changed by the owner. Some, however, can be tackled and by doing so the value of the business can be quickly and dramatically increased.

Having a more valubale business is clearly a huge benefit when selling the business, but it can also be a benefit if you aren't ready to sell. It can help attract employees, new clients, lenders, investors and even help you get better terms with vendors and marketing partners.

There is really no reason any business owner wouldn't want to work to increase the overall value of their business, although many never bother to do so.

If you are getting ready to sell, we can help you dramatically increase the value of your business in a short amount of time as part of our overall service. If you aren't looking to sell but would still like to build value, we can provide the same basic consulting service to you. And, if you have just bought a business and are thinking about growing it quickly or flipping it, we can help.

If you are interested in building the value of your business in any situation, give us a call and let's see if we can work together to make it happen.