Valuing Your Business
Best Predictor of Future Cash Flows?
Prior Years Cash Flows!
I talk to business owners all the time who ask me: “What’s the best method for valuing my company?” Valuing your business is one of the most critical components of businesses success – for two reasons: (1) you should always operate your business with an eye toward your exit strategy. This focus helps you filter all important decisions through the ultimate purpose of your business – to provide you with funds needed for retirement! Each decision should increase the likelihood that your retirement goals will be met on schedule; and (2) you need to know, at all times, what the market will pay for your business. If you don’t know that answer, then how can you possibly plan for your family’s financial future?
Determining the value of a business utilizes a systematic process. Warren Buffett has been quoted as saying: “…business schools should be encouraging students to learn the boring, critically important, discipline of business valuation.” It is important to understand the components involved in this process. This can be compared to a lawyer drafting your will or an accountant preparing your financial records. Even though professionals are handling these important tasks for your business, you should still have an understanding of the foundational principles involved in these tasks. This same concept applies to valuing your company. Business valuation is a process that you, as a business owner, should understand. The process can seem complex, but the two baselines of the valuation are easy to grasp: (1) What is a reasonable forecast of cash flow of the business for the next 3 years; and (2) What is the risk that this forecast significantly overstates or understates future cash flows?
Assets are nice, but they only provide the lowest value of a profitable business. Revenues are close to meaningless when determining business valuation – unless the buyers are using the same valuation metrics used to value tech companies in the late 90’s. What you need is a high likelihood of large amounts of future cash flow! And, prior year cash flows are the best predictors of future cash flows. To read an excellent article about basic business valuation, click here.
The professionals at the Summit Acquisitions Group begin each of their engagements with a business valuation. We can either prepare our own business valuation (quite often at little to no cost) or help coordinate the valuation by an independent business appraiser (usually between $6M and $10M). The professional appraisal valuation is usually within 5 to 10% of our valuation.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.