by Kelly Deis of SoundPoint Consulting
Most business owners focus on increasing profit margins as the primary means of improving the value of their business. Profitability is absolutely important, but it is not the only factor to consider.
In fact, there are three components which can increase – or decrease, the value of a business: risk, profitability and growth.
Take for example a recent client. We determined the valuation of the business to be about $1 million.
We then illustrated that if they were able to incrementally decrease risk, improve profitability and accelerate growth, they would be able to realize as much as $300,000, or 30% of additional value.
- Decrease risk (discount rate) 2 pts: +$80,000
- Increase profitability 10%: +$100,000
- Increase annual growth 2 pts per year: +$120,000
Now, will this client be able to realize the full $300,000 in incremental value? It really depends on the timeframe and level of effort that they want to put into improvements. It is a good idea to identify the range of opportunities and then prioritize activities.
Have you ever heard of it? Well, if you are thinking of selling your business in the next few years, it is a term that you should get familiar with.
