Business Management

Creating value in the business

Value of a business is not just the price paid to purchase it or what it might sell for. Different values can be created depending on operational factors.
Here are a few factors that can influence the value of your business whether you are selling or not.


1. Performance
Value will be more dependent on future projections than past performance. History helps set the base but future plans are of more value. Cash flow is the most important factor. Revenue is secondary but a company with higher cash flow is more highly valued. Cash Flow drives value more than Profits.
Other factors affecting performance will include customer loyalty, brand strengths, industry trends, and capacity of the facility used.
2. Leverage
Value of the business can be influenced by financial leverage that can be generated. A business with a high asset base may have greater borrowing capacity or credit capacity.  This will enhance value as it may facilitate financing growth. Assets of the business are an important factor in determining value. State of the art equipment is important as it puts the position of a new buyer not having to further invest upon acquisition and at the same time it allows the seller to expect a higher selling price.
3. ROI
A buyer looks at value in the context of expected Return on Investment. The higher the expected ROI, the lower the business has value. A number of conditions can influence the expected ROI including strength of the balance sheet and financial history, strength of the management team, quality of the product line and distribution, and property values.

4. Exit Strategy
Value of the business will be influenced by the circumstances of the intended sale. If urgency is involved because of death, illness or pending retirement of the owner the value could be depressed. If a longer time horizon is in play and the owner can play a role in financing the purchase through a vendor take back there me be a positive influence on value.
These are some of my thoughts on factors influencing business value.

Please let me know your comments.
Gerry@polarisgroupmc.com