How to Maximize the Value of a Business
Have you considered the idea of selling your business or buying a business?
In order to Maximize the Value of a Business one needs to look beyond the financial statements.
Yes, historical income reflects anticipated future benefits, but has the owner maximized the potential of the business by addressing the many drivers that affect the value?
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) reflect the financial performance of the business, but what is the cash flow of the business? There are other considerations, like Working Capital requirement (WC) and Capital Expenditures (CAPEX). Ultimately a buyer wants to know what the Free Cash Flow to Firm is (FCFF) and Free Cash Flow to Equity (FCFE).
These are the Main Value Drivers behind a Successful Business:
Historical Financial Performance
Future Profit Potential
Cost and availability of Capital
But there are many more value drivers to consider:
Goodwill, is it personal or commercial?
Anticipated Capital Expenditures
Are there Systems and Processes in place and documented
What is the Growth Potential of the business
Does it have Intellectual Property
Is there Research and Development activity
What is the business’ Status within the Industry
How much Competition is there
Is the business Cyclical in Nature
Dependencies and vulnerability to the economy(i.e. Oil Industry related businesses)
What does the Management structure look like
Are there any changes in Regulations on the horizon
Does the business have specific Licenses or Accreditations
Does it operate in a Niche Market
Obsolescence (Equipment, systems, Inventory)
Portability (can the business be moved)
Barriers to Entry
Contracts and recurring revenue
History (Social media status)
As a Seller you will want to consider which one of these you can improve on to maximize value. For a buyer it is important to consider all of these factors before making the decision to buy a business.