Business Analysis

Profitable Business Yet NOT Valuable?

Is your business profitable? OK… Is it valuable? While I was prospecting for small businesses to sell I ran upon a small manufacturing business with commercial energy materials that had been around for about 3 years and was doing $300,000 annually in gross sales with a margin of 60%. From the surface, things look great. With a quick evaluation we determined to have about $300,000 in business value (3 x EBITADA). What happens next?  Join us and talk about the what ifs in a Business Owners’ Round Table.)

So I ran to my Manager with a potential business listing (See Author’s Bio). He put on his business value glasses and asked a few questions. He then asked me, “Did you know a business could be profitable but not valuable? Many of us often think, “What is the value of that company or my company?” I was unsure at the time. But listened to his advice that a customer base with 20-30% or more with one type of customer lowers in value. Join a Business Owner’s Round Table and talk about your options.

There were several other areas he went into but specifically pointed to how the product, customer base and value were tied together. I realized this advice was not written down anywhere so I started taking notes and eventually had enough for a book. How might this be applied with businesses in other situations?

The book, “14 Immutable Laws of Business Value“, was written to help Business Owners with a business valued at 5 million and under, with a guide for not only looking at their company but also to use while targeting another business or for leveraging their equity, so avoiding pitfalls. What questions are you asking about business value?

With the notes I complied from over 20 years, the right questions could be asked for a better picture of business value.  For example, rule number 4, pg 13., in the book, “14 Immutable Laws of Business Value“, states, ” Business Value rises as a customer base is more diverse.” There is more in the book about this and other laws but basically, in this particular situation, the Manufacturer had one government contract.  Yet, it was profitable. Get insight at the monthly online Business Owners’ Round Table into your particular situation.

There is more to the story, but, how do you find if the business has a diverse customer base and what % of the customer base means less value if one or two customers were the main ones or only ones? Join us and talk about the what ifs in a Business Owners’ Round Table.

As you know, a slight offense to the government official that extended the manufacturing contract could end the contract. Yes, it depends on the situation but this business would not a get a full 3 X EBITADA valuation from an appraiser even with profitable sales. Get more questions to ask about business value in the book.