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For a more valuable business you’ll need to hit these sweet spots

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For a more valuable business you’ll need to hit these sweet spots

By , July 20, 2011

Part 1 – What Makes a Business Valuable

While every business certainly is different, there are a few trademark characteristics that we see time and again in high value businesses. Any business with good backbones can have these same winning characteristics woven into the fabric of the business: This is music to the ears of succession planning clients who are getting ready for an exit from their business, as it means they can realise a higher price for their business … provided they have the right planning, knowledge and execution of a strong strategic succession plan.

Weaving these winning characteristics into a business is the focus of Step 8 of our Business strategic advisory program, which is all about Value Enhancement.

First, let’s get a grip on some business value basics. Rest assured, I’m not about to launch into valuation theory or talk about the different profit multipliers across industries. These things all come out in the wash and don’t really make a particular business stand out from the crowd: By ‘high value’, I mean those businesses that stand ahead of the pack in their arena; ahead of the competition in their industry, their market.

To be ahead of the pack; to have a really valuable business, it helps to view the business from the perspective of a potential purchaser. The purchaser would be crazy (or ill advised) if they only consider the past performance of the business: after all, they’re making this purchase because they expect a return on the investment. So a well educated purchaser will analyse the business in a way that helps them formulate a view of what the business is likely to return in the future. A purchaser will probably ask themselves, ‘how certain are the future earnings of this business?’. If the business has a high degree of uncertainty (ie. risks), and it doesn’t show any history or potential for increased future earnings (ie. growth), then the purchaser will be less certain of the future earning potential, and therefore less willing to pay a good price.

This translates to:

Business Value is High where Growth is High and Risk is Low … or

Business Value = Profit x (Industry-based Profit Multiple adjusted for Growth and Risk)

So now we understand that fewer risks and stronger growth make a business more valuable, would you like to know what the Big Ugly Risks and the Gorgeous Growth Attributes are? Hit these in your business, and you’ve found some real sweet spots when it comes to making your business more valuable.

In my next article on succession planning, I’ll share with you the Big Ugly Risks … and later, the Gorgeous Growth Attributes.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.