Given how critical it is for privately held business owners to know what their company is worth, I thought I would visit the topic this Saturday evening. If nothing else, if you are doing any estate planning at all, or planning for the future both personally and professionally knowing what your company is worth is vital. Most business owners have somewhere between 80-90% of their personal net worth tied up in one highly illiquid (not easily converted into cash) asset: the company they own.
Not only does this make estate planning tough, it also exposes the financial legacy you may want to leave behind to your offspring to tremendous risk. Even if you are not planning to exit any time soon, understanding what drives the value of your company today will allow you to take steps over the years to enhance and grow. Again, I am stressing understanding key drivers are extremely important.
Here are 8 key drivers I want to share with you that are critical when determining how valuable your business is.
8 Drivers of Company Value
Your history of producing revenue, profit and strong cash flow combined with the professionalism of your record keeping, in other words, “clean books”.
Your likelihood to grow your business in the future and at what rate.
How dependent your business is on any one employee, client, or referral source.
Valuation “Teeter Totter”:
Whether your business is a cash suck or a cash spigot.
The proportion and quality of automatic, recurring revenue you collect each month.
How well differentiated your business is from competitors in your market.
The likelihood that your clients will use you again and also refer you.
I saved the best for last...
“Hub & Spoke”:
How your business would perform if you were unexpectedly unable to work for a period of three months. Yes...three months.
I completely understand. Running a business causes owners to make dozens of decisions daily, many times without much advance thought and consideration. Unfortunately, it can become easy to lose perspective amidst competing priorities and deadlines. Understanding what makes a strong healthy, thriving business is important for many reasons. Having the perspective of a potential buyer provides a look into how others would view the business, the size and scope of the asset that has been created, and identification of important and sometime latent value drives.