Maximizing Business Value
Business value is the total value of the physical assets of the business and the value of goodwill. The physical assets consist of automobiles, equipment, computers, software, account receivables, etc. Goodwill is based on future cash flow the business will generate, name, and reputation in the marketplace. With that said, name and reputation contribute to future cash flow by making it easier for the business to acquire new work and generate future cash flow. This also helps to minimize risk because clients are comfortable with the product quality.
Do you know that you can have two businesses in the same market, doing the same thing and earning the same amount of money, yet they have dramatically different values?
Suppose owner A works 70 hours a week, never takes a vacation, is the sole decision-maker, and does all of the business development. Suppose Owner B has a management team that does business development, works closely with the clients, responds to most of the questions, takes two weeks off in the summer, two weeks off in the winter, and works a half-days on Friday. Would you pay more to purchase business B?
Time and significant effort will be required to separate owner A from the business. Also, there is an elevated risk level because it is unknown if clients stay with the new owner. By the owner being a spoke in the wheel and not the wheel, the more valuable the company. To increase business value, the owner needs to diminish their role and expand their employees’ roles. This means that other people should be doing business development, interacting with clients, and answering the basic questions.
When it comes to architecture, engineering, and land surveying businesses, the employees’ licenses, certifications, and credentials significantly impact the business’s value. The typical buyer needs people to do the work, and there is currently a shortage of skilled workers in these industries.
Sometimes, companies are being purchased for the employees to help with the current work of the buyer. A skilled workforce increases the value of the business. The longer the selling company has employed the key employees, the more attached and more likely they will stay after acquired by the new owner. This increases the goodwill because a buyer does not want to purchase a company for the key employees to leave shortly after the acquisition.
Profitable, repeat clients are a strong indication of future cash flow and reduced risk. This increases goodwill and business value. Business clients and government clients are perceived to be more valuable than consumers because of the projects’ size and potentially better profit margins. Larger projects lead to a more substantial pipeline of future work, increasing future cash flow, and reduced risk from downtime.
Opportunities for growth from geographic expansion, new product offerings, and new clients increase future cash flow and reduce risk. The owner needs to prove these growth opportunities exist by securing some of the opportunities. In summary, future cash flow and reduced risk increase the goodwill, a driving factor of business value.
Allen Business Advisors www.allenbusinessadvisors.com is a business brokerage firm that specializes in selling architectural, engineering, and land surveying businesses. If you would like to learn more about selling your business, Ctrl+click here. If you would like to receive our monthly email of businesses for sale, Ctrl+click here. If you would like a copy of our e-book Top 10 Mistakes to Avoid When Selling Your Business, Ctrl+click here.