Not understanding the value of your business is by far the biggest mistake an owner can make.
If you don’t know the value of your business how are you going to know when you sell if you have a good offer on the table or if the buyer is trying to take advantage?
How will you know if the sale of your business post-tax impact will provide you with the necessary liquidity to meet your financial goals?
Understanding the value of your business is critical as you grow and ultimately exit your business.
A quantitative and qualitative analysis will identify the value and will also highlight gaps in value that can be improved to increase the return on investment you receive upon exit.
Valuation is an art and a science and right now we have economic forces that are squeezing valuations.
Inflation triggers interest rate increases which makes capital that buyers need to leverage a deal more expensive. When we value a company we discount future free cash flow to today’s dollar.
The discount rate is calculated through a build-up method. We start with a risk-free rate – the ten-year treasury and then build up, adding an equity risk premium, the risk of your industry, and the risk of your specific company.
To give you a bit of insight into what we are seeing today, the equity risk premium, which is the excess return required by an investor to invest in the stock market as opposed to a risk-free investment, has moved to the top range of historical premiums. This pushes our discount rate higher.
The higher the discount rate the lower the value of your business.
You can’t control external forces like the equity risk premium but you can control the quality of your business which is your company-specific risk.
The only way to understand the current value of your business and how to increase the value to drive its marketability is to have a proper mergers and acquisitions valuation performed.
If you are thinking about exiting your business via a sale to a 3rd party you must understand the value of your company for M&A purposes. You can learn more here.
One of our clients just sold for $46MM and change. Our value was $45,869,539 – within 2% of market.
The ultimate value (their perception of risk) will always be in the eyes of the beholder, but know your number!
If you want to understand the value of your business reach out to me here.
Build your business with intent and with a team that can help you successfully exit.