TV shows such as Shark Tank often portray business owners who have no understanding about the valuation of small businesses. It has been seen that over 80% small businesses have no financial estimate as to what their business is worth and in many cases, the business owners don’t seem to care. When one would not run one’s personal life with no inkling of finances, one should also not run a business in this manner.
The reason business owners should care about valuation is because their own personal wealth is linked to the valuation of the business. The retirement value of an individual is directly linked to the value of the business. The fact is about 70% of private companies in the US will be up for sale by 2030 but only about 30% can be sold. The main reason for this is that small business owners don’t pay attention to the valuation of their businesses.
Where does valuation come from? Essentially, it is assigned based on the profit income of the business. The most common benefit stream is Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). When you finally intend to retire and plan to sell your business, you will end up selling it for a multiple of whatever your EBITDA is. The bigger your company is, the higher the multiple will be, and therefore the higher your valuation will be. The key to getting a good valuation, is increasing your multiple. This in turn requires an aggressive strategy that is linked to the valuation of the business.
The positive is that today, several financial professionals are offering cloud based solutions that enable small business owners with road-trips to help increase value. The negative is that this road map can take over five years to be put into practice. In addition, these road maps require a well trained professional team to empower this process. Listed are two solutions small business owners can implement:
- Value Opportunity Profile: This profile is a complete assessment of your business that is based solely on responses gained from interviews with the managerial force. These responses elicit specific recommendations that allow value to increase in three phases.
- Value Builder System: This system involves a 12 month program that begins with your self assessment. Following this, you can decide whether or not you want to go ahead with this program. If you do decide to do so, there will be specific exercises used each month to increase the valuation score of your business. As this is a 12 month process, improvement will happen gradually, over time.
Regardless of how you finally reach the goal, it is important for every owner of small business to have an understanding of the valuation of the company. They must understand how the valuation of the business is directly linked to their personal wealth. As there is a lack of business owners who have a clear picture of what valuation is and how to improve these scores, it is necessary to bring in a team of trained professionals. These professionals will help owners structure and implement the process while other team members carry out day to day activities in the company.