I have represented many business buyers and sellers over the years and throughout numerous conversations with business owners, I have encountered the questions, “What is my business worth?” and “How do I increase the value of my business?” These two questions are actually much more academic than they may appear to be initially. In all actuality, the primary reason why the enquirers asked these questions is that they have been too busy as entrepreneurs starting and growing their businesses to really take the time to consider the answers.
As any competent business broker will attest, a business is worth what an interested investor will pay for it. Within an investor’s consideration, however, there are two primary underlying factors that guide the investor’s determination: 1) how much net income does (and will) the business generate and 2) what is the risk that the current (or greater) level of net income will continue into the future and survive the purchase transaction.
In terms of identifying the current level of net income and the prospect of that net income continuing into the future, most business buyers pull no punches when it comes to due diligence. Uncompromising buyers are fully aware that only a rare individual owner will offer up a business for sale at a bargain that is a cash cow and requires minimal risk and effort to operate. As a result, potential business buyers are extremely skeptical of the net income reported by the current owner and often factor in their own “fudge” factors to be sure that they are not being taken to the cleaners. Ironically, business sellers would be far better positioned if they were to go to great lengths to divulge ALL of the difficulties that they have experienced with the subject business to potential buyers than to try to cover any of them up. As a matter of fact, a seller that divulges significant problems that they have encountered while owning the business and the distinct steps that they have taken to overcome those difficulties stands a far greater chance of being believed and having a lower “fudge” factor assessed against them by a potential buyer than a seller who purports that there have been no problems or concerns. The latter is simply fiction and, when it comes to the real world, very few people appreciate being the target of a fairy tale when their investment capital is at stake.
So let’s answer the two questions: Your business is worth the dollar amount that a prudent investor will pay for the net income stream that your business REALLY produces, given the REAL risks that the net income stream might be interrupted in the future. Depending upon many factors, to include industry, location, client base, capital assets, intellectual property, etc., the value of your business could be a little or a lot and even negative or positive. A competent business broker will be the best person to provide you with the most accurate dollar figure, based upon ACCURATE information.
Regardless of the answer to the first question, however, the answer to the second question is always the same. A business owner can only increase the value of his or her business by increasing the REAL net income of the business or by reducing the REAL risks that the current net income stream might be interrupted in the future.
As a matter of fact, relatively small increases in REAL business net income can lead to rather substantial increases in business value. If, for example, an investor is looking for a 10% annual return on his or her investment in a business and the current net income of a given business offered for sale is $1MM per year, the investor would value that business at $10MM ($1MM/.1=$10MM). If, however, the seller of that business was able to demonstrate that he or she had found a way to increase REAL net income of the business by a mere 10% from $1MM to $1.1MM, the same investor would value the business at $11MM ($1.1MM/.1=$11MM). That’s $1M in increased business value predicated upon a mere 100K increase in REAL annual net income—which can be attained by increasing gross revenue, reducing expenses, or a combination of both.
At Amelioration Incorporated, we assist companies across diverse disciplines to greatly increase net income, reduce risks, and exponentially increase business market value. We guarantee a substantial net income return on the investment in our business process improvement services and offer a free business process audit to business owners. Finally, we pay a lucrative finder’s fee to the business brokers and other individuals who refer us. Contact us today for a free business process audit if you are a business owner so that we can show you how to increase your business value; contact us as well if you know someone who owns or operates a business to find out how you can be compensated for making the introduction: http://ameliorationincorporated.com/services/business-process-improvement/