Maximizing Value for Your Company

by Gokul Padmanabhan – Orlando, Florida Franchisee

Sooner or later many companies end up with more than they need for a successful operation. Being a business owner myself, I confess we love to dream big and perhaps overestimate when preparing for the future. We might obtain more office space than we presently need or buy more equipment “just in case.” We often mistakenly rationalize these decisions by declaring that if business increases significantly, we will need that extra room or additional piece of equipment.

The truth is, if and when you need the added space or that new printer (which does everything but make your morning coffee), you can always purchase it at the time you most need it for practically the same price you are going to pay for it today. So, why spend the money ahead of time?

As professionals in valuing businesses, we know that a profitable organization is valued based on its earnings — not its assets. It makes sense, then, that having a smaller office or passing on the latest technological gadget does not diminish the value of your business at all. Indeed, running your business frugally and showing a healthy bottom line is a surefire way to increase the value of your business.

Business Valuation – What Is a Business Worth?

Determining the value of a business is the first step in the process of buying or selling a business. The value of a business is related to the risk involved, the ability to generate an income stream, and the value of the tangible assets.

An expert business valuation report will be based on standard valuation methodology combined with the experience and knowledge of the valuation expert. The specific purpose of the business valuation and the size of the company will determine the depth of analysis and research required.

Basic factors that influence value are:

  • Value of hard assets
  • Recast cash flow analysis: normalize earnings
  • Review factors that can impact future earnings
  • Calculate and apply external factor discounts
  • Analyze intangible values

 

The final step of a business valuation report is to make sure that the suggested price for the business passes the sanity test:

  • Will the income cover the debt service?
  • Will the cash flow provide the owner or manager with a reasonable salary?
  • Can the cash flow provide for future capital equipment requirements?
  • Will the cash flow provide a cushion to allow for fluctuations in the business cycle?