In our last blog on preparing your business for sale, we looked at questions you should ask before you sell your company. In this blog, we are looking at how to measure value in your business.
Most private business owners look at revenue and profit as their foundation of value. And this is okay, as we know numbers are defensible – they follow GAAP which provides us a foundation of standards to report on. But revenue and profit are past performance indicators and it’s the future operations that someone will want to buy. A better definition of value is whether your revenues and profits are sustainable and transferable. That means they will continue to be generated without you, the owner, in the business.
There are many methods used to determine your company’s value. At WelchGroup, we use a diagnostics tool that looks at 18 different drivers that impact value creation – including the goodwill that many have a hard time to assess. The 9 market drivers assess the external factors that impact value in your business, such as growth, recurring revenue, brand and how your service/product is different from others in the market. The 9 operational drivers look at your ability to deliver operationally over time without the current owner in charge. They tend to be internal factors that impact value, such as your strategy, your management team, your financial & operational history and your competitive landscape. You should be looking at all of the external and internal factors in order to determine the value.
Think of your business like an engine with each driver as a gear. The gears need to work together to drive the best possible output. If one of the gears is damaged or broken, it’s difficult to move forward successfully. As you walk through the process of examining your business, understanding these gears can help you to measure the potential of your business which you can then convey to your buyers. Knowing the value of your business and being able to back it up allows you to always come from a position of strength at the bargaining table. This is a topic we covered in depth in our “Shift Your Company Into High Gear” event, which you can download here.
For more information on value or our diagnostic tools, please contact me at [email protected]. Stay tuned for our next blog in this series on thinking like a buyer as you position your company for sale.Candace Enman, CPA, CA President WelchGroup Consulting