Nobody will want to buy your business if you run it like Budget Direct's Captain Risky. If they do, they will want to pay much less for it. A business valuation will always be affected by the amount of risk. This is fundamental to any business valuers who have been asked to provide their opinion on an enterprise's net worth.
The better you show less risk in certain areas the better it will be for the overall value.
What are some of the key areas then?
Figure 1: Would you pay top dollar for a business run by Captain Risky? Budget Direct will offer better deals for less risk - it's the same when selling a business!
1. What Industry Do You Operate in?
Is your industry:
- influenced by negative global trends;
- have a positive industry trend into the forseeable future?
2. What's Your Business Performance Like?
How well has your business performed in terms of:
- number of year's profitability;
- current year increase in sales %;
- current year increase in gross margin %;
- wage increases compared to sales;
- increase in current year adjusted EBIT;
- improvement in liquidity (debtor days, inventory days, supplier days etc);
- industry benchmarks;
- ability to control operating costs.
Figure 2: Having a bath with the electric light on the edge is not ideal!
3. What About Business Growth?
Are there good prospects for growth with new products or services or new geographical locations? Is plant and equipment in good order and do the premises allow for growth? Has a business plan with three way budgets including cash flow forecasts been prepared?
4. General Risk
With general risk this will include areas such as whether supplies are subject to inflationary pressures or exchange rates? Does the government protect the supplies you make? How badly will your business be threatened by technology or the web? The taxi industry, Encyclopedia Brittanica and Gregory's Street Directory are good examples of this as is say Video Ezy.
5. What About The competition?
When looking at competitors:
- are they aggressive?
- can the big boys come in and crush you (Coles, Woolworths etc)?
- can they easily enter the market ('barriers to entry' high or low?);
- do they have better access to resources than you?
6. What Are your Management Information Systems Like?
Do you receive good solid financial results on a very timely basis (e.g. daily sales and margins or weekly financial reports through Xero etc);
How well do they split things up so you can analyse (such as divisional profit & loss statements or product margins, sales by customer type, location, highest spend etc). Data mining systems will help you with this.
7. Owners, Customers & Team Members
Is the business very reliant on the owners? If so, this will have a negative impact. This would be the same if the business relies on a few customers for most of its revenue.
Any easy transfer of IP, or management processes (procedures manuals etc) will lift the value up.
What would happen if the owners had to leave or a key member left?
If you would like to know how well your business scores in these areas, please click on the link below and we will run our diagnostic for you and tell you what effect it will have on your business valuation if you can answer the poor ones better.
Address these and not only will your business valuation jump up but also so will your profits.
It's a win/win!