A question that often comes from business owners as we discuss other matters is: What is my business worth? With any luck most business owners derive a regular paycheck. However, many entrepreneurs want their efforts and their dreams to be realized in some measure of monetary value. After all, we do read the business journals of fortunate business owners who ultimately sell their businesses for profit and go on to drink Coronas on some distant beach with the ocean waves lapping at their feet. Truth be told, there is no simple answer to what a business is worth, that I could cover in this snippet. And there are also many ways in which to value a business.
Many, perhaps the majority of small businesses are leveraged from operating revenue. This is to say that the value of the company is based on its ability to continue operations and earn a profit from revenues. Which also suggests that if you stop generating revenues, or if you remove the revenues from the business, it is potentially worth little more, if not less than, the actual book value of a company. Of course there are many exceptions beyond what I can write here. However, for illustrative purposes we will stick to that theory.
So what if you want to sell that business in the next few years. How can you sweeten the deal, make it more attractive to a potential buyer? So much so that they would be willing to pay a premium to buy your business. Two thoughts come to mind. (a) Branding and (b) Infrastructure. Not surprising that every medium and large business in this country, if not the world, spend collectively billions of dollars a year improving these two areas.
Branding, generally increases sales. This potentially creates a higher value by itself as many operating leveraged companies sell for multiples of revenues. Secondly, because branding essentially is a label that inherently stands for "value". Like, if you want to buy my business, I will require a premium price. In simple terms branding is, stand for something, be recognized, or an offer of value.
Infrastructure allows you to operate at higher efficiency. Again, potentially higher profits and a higher value. It could also mean that you are geared for higher business volume which you have not achieved but your potential buyer knows he can. Infrastructure, gives you a competitive advantage to other competitors because it is an investment that can at times be a barrier to similar businesses who have not made the required investments. Hence, they are less able to compete in a given market, less able to increase revenues and be able to support those revenues by means of performance. Less able to deal with management and growth issues than competitors. This means your potential for additional revenues and profit is a matter of marketing. Infrastructure comes from, management information and accounting systems. Customer relations and order taking systems. Investments in machinery, equipment and perhaps vehicles. It can be hiring the right professionals. It can also come from integration of functional areas of your business model. Perhaps the development of distribution channels. In this area there are indeed countless possibilities. Simply put infrastructure refers to the business machinery required to operate.
So what have you and your accountant talked about lately?