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Money / Pricing strategy

Small business valuations: What is the value of your business?

People tend to focus on valuations only when they are ready to exit their business. But what if you put it front and centre when you come in the door?

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Valuation doesn’t simply give you a price. It gives you a strategy. Rather than focusing solely on income, instead ask the question: what is the most valuable income I can create?

Aiming for a specific value immediately answers a lot of strategic questions.

If you want to sell your business for $1m in five years time, you already have a strategic target. In terms of vision, mission and goal, you have already put some of the pieces of the puzzle together. The parameters for making a lot of other decisions are now in place.

Where is the best future value in your industry? Different sectors command different values. Buyers will pay more for high growth potential, but they will also pay handsomely for consistent, reliable returns. Ditto for entrenched market share.

When looking at small business valuations, it can be helpful to look at your business from three perspectives:

"Which activity is the candidate for intense strategic focus?"

Income streams. Break you business down into component income streams. What is the most valuable? Mature or declining income streams are candidates for disposal, not investment. Should you buy your premises or lease them? If you own them, should you sell and invest the proceeds in more highly valued activities? Target the strength of your best income stream. What can you do to defend it, entrench it or expand it? Does focus on low margin/high volume generate value; or the opposite? Which activity is the candidate for intense strategic focus?

Want more articles like this? Check out the pricing strategy section.

Business strategies. What maximises future value? Will it be greatest if you target building your brand? Or should you focus on dominating your geographic location or market space? Is value enhanced by buying out a joint venture partner, or selling into one? Or does value creation lie in expanding into new markets or forming key alliances?

Financial presentation. Who is the likely buyer of your business? A single buyer may focus on the very bottom line, i.e. net profit after tax. If so, that is the line you will want to maximise. A trade sale, or say a leveraged buyout, might be more interested in EBITDA (earnings before interest, taxes, depreciation, and amortization).

That’s because strong cash flow supports a buy-out based on borrowed funds. That price could be significantly higher than bottom line valuations. Financial presentation has big implications for price. Your strategic decisions around debt, tax planning and fixed asset investment will shape the way your business presents.

Begin with the end in mind

Many people start a business and want to run it forever. The truth is that sooner or later you will want to do one of the following:

  • raise more money to expand
  • merge with another firm
  • form an economic alliance
  • take over another business, or be taken over by one
  • sell to the highest bidder and retire
  • bequeath it to your children (usually the lowest bidders!)
  • buy out your partners or sell your holding to them
  • maybe even go public.

Every one of those alternatives will require a valuation of the business. The higher it is, the stronger your hand. What do you want that figure to be?

When you have made that decision, you can start working out how to get there.

Have you given the value of your business due consideration or do you need to think on it further? Tell all below.

Alan Hargreaves

has spent 35 years in finance and business consulting. His private equity and advisory services span IT, media, property, finance, and retail. He is author of the management book, Recharge, published by John Wiley & Sons.

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