Have you ever asked yourself what is your business worth? Not because you want to sell it. But if you have worked really hard to build up the business, you deserve to know how much it is worth in the market point of view. Be aware that if you cannot sell your business, all you have is just a well-benefit job with no value embedded.
Many small business owners believe they have established a great business with a “considerable profit” that leads to view of overestimated value. But often they fail to take into account that they forgot to pay themselves a salary for the past few years. So suddenly that business becomes less attractive to the market.
Historical financial data only show what you have achieved. Sustainable future performance of cash flow is the key component that makes a business attractive in the market’s perspective. To build up a valuable business, owners need to review all tangible, intangible and contingent factors, with the view to pinpoint the key drivers and focus them in their business plan.
In additional to the market growth, market competition, economic conditions and other external variables, the factors that really matter to the business value are those difficult and time-consuming to replicate by the competitors.
Goodwill and other intangible
Business goodwill reflects the synergy among the various assets developed within the business to produce income. Some industry-accepted valuation models do not factor such to reflect the business going concern value.
- Quality of the customer, which affect the business operating margin and profitability. Business owners could setup their differentiate service, priority and charge to various clients to maximise the profit.
- Customer loyalty and relations. These would affect the sustainability of business income stream and new business referral. This would reflect in sales trends and the valuation of customer list.
- Employee skill sets and loyalty, which affect their performance and customer satisfaction. With the aim to diversify the income source and enhance customer experience, more and more business recruit a mix of experienced staffs to provide client one-stop integrated service.
- Brand recognition and business reputation. Lots of profitable small business highly relies on the owner’s charming personality and their relationship with client. The power of branding and reputation would come into focus when the business operates without the principal.
- Quality of internal system and procedure. Good compliance, end-to-end record keeping and standardise process would help the business operate in a simple and effective manner that allow smooth transition to new business owner. This also affects the transferability of the business.
Business valuation is a combination of art and science. Reviewing the financial figures and performing add-back adjustments are just a starting point of the valuation. Business owners should contact a specialised consultant who is equipped with essential skills and industry experience in determining the fair market value of a business.
Should you have any concern about how to value and build a successful business, please contact the team at The Quinn Group on 02 9223 9166 or submit an online enquiry.