Valuing a business can quickly become an overly complex conversation; there are heated debates about recurring and non-recurring revenues and expenses. Deep philosophical discussions form around the best method to assess the value of a business, comparing things such as Enterprise Value (EV) / Earnings Before Interest Taxes Depreciation Amortization (EBITDA), EV / Revenue, and Discounted Cash Flow (DCF) analysis. People labor over which public company and precedent transaction (Comps) should be used, which businesses are comparable, the relevant regions, fair value for assets such as real estate, equipment, or intangible assets, depreciated assets, the liquidation value, the value of management options… and the list goes on.
For owners and managers of a business there is no need to get caught up in the complexity of valuation analysis. In fact there are only three things that you need to be concerned about:
- Growing the business
- Enhancing and maintaining profit margins
- Finding strategic value when possible
The value of a business does boil down to just these three fundamentals. If you can grow your business, then you are adding value. If you are growing your business faster than your competitors, then you are adding significant value. Profits of course have a tremendous impact on value. If your margins are higher than your competitors, then you are adding significant value to your business. Finally, try to add strategic value to your business when possible. This can be situational such as a large customer who needs your specific product line, or having a type of equipment that no one else has, or being a business in a supply constrained sector. The more you think strategically about your business, the better chances you have to achieve inordinately high value, the “trifecta of valuation.”
By David Strickler