Understanding Your Business’s True Value

Date posted: March 12, 2012

By John M. O’Brien, The BVC Group

While meaningful market turnaround may be lacking at this point in the economy, merger and acquisition opportunities remain, particularly for smaller establishments whose profitability may be appealing to larger companies with cash on their balance sheets.

No matter what specific field you’re in, knowing the true value of your operation is essential.  A larger company may make an offer that seems reasonable – or perhaps more than expected – but you could still be leaving money on the table.  In other circumstances, it’s also imperative to understand the value of your business with regard to the sale of common stock, estate or charitable tax requirements, management buyouts, or just a fiscal check-up.

It’s never too early to get a firm handle on the value of your business and to identify its value drivers…keeping in mind that you can grow your business, without growing the value.

Ultimately, in just about any industry, it’s all about the margins. Prospective buyers are less concerned about sales than they are about margins and sustainable cash flow. And for the small business owner, there are a lot of variables to those all-important margins– the weather, the cost of heating oil, the price of materials, etc.  Protect margins by pricing accordingly; keeping in mind that erosion of margin is the erosion of value.

Rule of thumb is a three-to-five-year window to plan for exiting or to position for sale…and evidence of sustainable cash flow is critical. Savvy buyers recognize that a 40% spike in revenue may not necessarily be the best indicator of long-term value.  You can ‘strip mine’ a business for a couple of years and grow the margins but that does not set the table for future growth.  A savvy buyer will also recognize this and adjust their offer accordingly.

Sustainable growth is defined by steady increases year to year. Regardless of where you are in your exit planning stage, remember that high margin and constant cash flow is what will attract a potential buyer.

John M. O’Brien is managing director of The BVC Group, a professional services firm providing independent business valuation opinions to clients, based in Amherst, N.H. John’s work has been reviewed by the Big 4 public accounting firms, and he has successfully worked with companies all the way through the IPO process. For additional information visit www.thebvcgroup.com.

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