by Dave Driscoll
When it’s time to sell the business, value drivers determine the value of the business and impact the desirability and risk for a potential buyer.
Great! But what does that mean?
OK. Let’s look at why and how much “value drivers” influence the selling or buying of a business.
When a business broker produces a market business valuation, a specific list of business value drivers is rated: Historical Profits - 15%; Income Risk - 15%; Business Growth - 15%; Terms of Sale - 15%; Competition - 10%; Owner Dependency - 10%; Location/Facilities - 5%; Desirability/Marketability - 10% and Business Type - 5%.
The percentage shown under the value driver indicates the influence of that specific driver.
Furthermore, the business broker producing the business valuation uses a scale to continue the weighting process. The scale goes from 1 to 5, with 3 being average or neutral or having no effect on value. The scoring is relative to the 3 neutral position – a score of 4 is a 33% increase in the value of that particular value driver; 5 is a 66% increase; conversely, 1 is a 66% decrease and 2 is a 33% decrease.
So, how does all this come together to incorporate the company’s value drivers into the market value of the business?
Let’s analyze historical profits, with an influence of 15 percent.
Say you are buying a business that demonstrates consistent profits year after year. The risk that tomorrow’s profits will not be approximately the same as yesterday’s is low, so this business would score 4 or 5. Conversely, if the profitability of the business has been sporadic, the value driver may score a 1 or 2, reducing the value of that driver by 33% or 66%.
The same process is applied to all nine value drivers, and the results are accumulated to weigh the overall performance and desirability of the business.
Other drivers:
• Income risk: Does the business consistently provide funds to support the owner’s personal cash flow needs?
• Business growth: Is the business maintaining revenue, growing or declining?
• Terms of sale: Does the seller require all cash at closing, or will some seller financing be considered? The pool of buyers is limited when sellers require all cash to purchase the business, reducing marketability and value. When a business valuation is produced for planning purposes (rather than sale), this category is assigned a 3 (neutral).
• Competition: Are there many or few competitors? Companies with unique niches and fewer competitors may move weighting to a 4 or 5 (value enhancers).
• Owner dependency: Can the business operate without the owner for extended periods of time without creating chaos? Yes? No? Substantial accumulative loss of value can occur in an owner-centric business. Place yourself in the position of a buyer: If the person responsible for all the daily operations (the owner) will be cashing out with your money, the effect on historical profits and income risk is not good!
• Location/facilities: Is the location in a less-than-desirable area? Are the facilities clean, maintained and organized?
• Desirability/marketability: Is t nbusiness marketable? In my previous business, we manufactured printed envelopes in high volume. Given the growth of the Internet and electronic communications, is a small printing company in a stable position? Would the type of business be desirable to a large audience or only to a select few?
Business type: Does the type of business require special knowledge, licensing or skills?
If you thought you really had no influence over the value – the real cash value – of your business, I hope this helps you realize there are factors you can enhance to create positive business value.
Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.
Submitted 8 years 240 days ago