Key Drivers Business Valuation Video
Let’s explode a few of the myths about business valuation and at the same time look at the Key Drivers Business Valuation
Drivers of business valuation. There are various factors influencing business value but before discussing them, let’s look at the various categories of business in Australia, according to their size. Now roughly these are:
- public companies,
- privately held and family small to medium enterprises and
- micro businesses.
The value of a business stems mainly from its profit. Not only current profit but also historical profit and as we will also, future profit. Buyers like to see a history of steady growth. Important is the accuracy of bookkeeping and records. The bookkeeping and financial records of the business need to be accurate and up-to-date. This is a sign of a good business operator and a good business.
Another factor affecting the value of your business is cash flow. Cash flow is the money left in the business over a period and must be distinguished from profit. You can be making a good profit but if your clients don’t pay their bills, you could be having negative cash flow in the business, despite profits.
Strategic value. This is something you’re looking at all the time while you’re running your business. That’s where a buyer gains more from buying your business than just the profit. The two businesses together create extra value. This could be by virtue of the buyer gaining a key employee from the purchase, securing a key product that it can sell to its database or some other benefit of the transaction. This is often called also synergistic value.
Economic conditions. The next factor is the economic conditions. Generally, the better the economy, the higher the price you can get for a business. See also our blog post on the timing of the business sale.
The value of assets. The next factor influencing the value of business is the value of the assets. Also see elsewhere on this blog our post on asset valuation method as well as the videos. There are different ways of valuing assets but the greater the asset value potentially the higher the value of the business even judged on a profit method.
Future earnings and profit potential. This is the one that a lot of people include in the professionals and the accountants miss. A buyer will value your business according to their belief about the size of next year’s income and to an extent the next year after that.