This is a question we are hearing a lot from business owners. With all the uncertainty surrounding when states will lift restrictions and if clients will come back, it is prudent for business owners to be mindful of how the value of their business will be affected. Therefore, here are some tips to help you understand how valuation professionals place a value on your business.
- A Bad Quarter or Year Does Not Destroy Your Value: When the economy sinks, it is easy to believe that the value of your business will be inalterably damaged. In fact, your business is valued based on its continuing ability to productively turn assets into income. Every business goes through down periods, but it is the overall trajectory of your company’s earnings and the operational strength to continue that trajectory that matters more than a bad quarter or year.
- Asset Value is Important: Many of the businesses we work with have assets that do not fluctuate in value as rapidly as the stock market or economy because the businesses sell staple goods and provide specialized service. For example, hardware retailers sell items like plumbing supplies and building materials that are not discretionary in nature. Another example is real estate agents, who provide a specialized service for an illiquid asset that is hard to replicate. When looking at the value of your business, it is important to consider the assets because these tend to be more stable than month-to-month or quarter-to-quarter cash flow.
- Deal Terms Impact Valuation: If you have a well thought out succession plan, you do not have to delay the sale of your business because of the pandemic, but there may be an opportunity to change the structure of the deal to allow for a higher valuation. For example, you could think about accepting less cash up front in exchange for a longer deferred compensation payout, or an emeritus position in your former company to help educate the next generation of leaders. Being flexible can help support a higher valuation for your transaction.
- Valuation Experience is Key: It is always wise to work with a valuation specialist who understands your industry and how to value a private enterprise, but it is vital during times of uncertainty. For example, hardware stores, homes centers and lumber/building materials outlets provide overlapping products and services, but they are different businesses and therefore need to be valued differently. Further, given the changes in the way business is conducted (e.g., virtual work, curbside pickup, etc.), the next few years will likely see a move away from valuing a business based on similar historical transactions because the very nature of what it means to be in business is changing.
- Spend Time Working on Your Business: A business with a specific target customer and well-defined operational processes is easier for a new owner to run and thus more valuable. We suggest spending one or two hours every other week working on the operational and financial strategy of your business. As a starting point, identify your current activities and services, how easy they are to teach, whether they can be diversified and whether they create customer/client loyalty. By using this simple chart, you can invest in selling to your core customer and reduce or eliminate ancillary services thus increasing the value of your business.