Are you having phenomenal sales? OK… Is your company valuable? Did you know you could have profitable sales and little or no business value? There are other critical factors besides sales volume during a valuation of a business. What are they?
Let us give you a true life experience to show this point: While Mr. Whipple was prospecting for small businesses to sell he ran upon a small manufacturing business making commercial energy materials. It that had been around for about 3 years and was doing around $95,000 annually in gross sales with a margin of 60%. The Owner had run into some personal problems and wanted to sell the business. From the surface, things look great for the business. With a review of the he determined to have it listed for $195,000 in business value (3 x EBITADA + a little more). What happens next?
So, he brought the paperwork to his Manager for a potential business listing (See Author’s Bio). Ralp put on his business value glasses and asked a few questions. He then asked him, “Did you know a business could have profitable sales but not valuable? He was unsure at the time so, he answered, “No.” And then listened to his Managers advice. He further explained, that a customer base with 20-30% with one type of customer or a business with one or two customers lowers the value of a business since it is dependent on that one type of audience or a few customers. And there is a greater chance to for something to change in the market place or offend one or two customers resulting in the customer leaving to a competitor. So the value of the businessness is not as high as a typical 3 X EBITADA.
Mr. Whipple was a little surprised but more because he knew this underlying factor was overlooked in most business transactions or in an internal growth initiative. And this particular manufacturing company only had 2 customers. What a mistake in a valuation this could be he thought. There were several other areas the Manager went into, but, specifically pointed to how the sales, product (s), customer base and value were all tied together. David realized this advice was not written down anywhere so he started taking notes and eventually had enough for a book(20yrs later). He then substantially lowered the value of the manufacturing company for the listing. Read how this might this be applied with businesses in other situations?
There is more to the story, but, how do you find what factors influence business value with your business. Get more information at this link.