Category Archives: Valuation

Risk and Reward in Business Valuations

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by Kelly Deis of SoundPoint Consulting

In its simplest form, the value of a business can be boiled down to just two components: risk and reward.
Although a significant amount of thought and rigor is required to determine the value of a specific business, the underlying concept remains the same: the value of a business is equal to the economic benefit (earnings or cash flow) that it generates divided by the risk it takes to generate those benefits.
Value = Earnings (or Cash Flow)
 Risk
Think of it this way. If two companies generate the same amount of cash, which one is more attractive (valuable) to investors?
  1. a Fortune 500 company in business for 35 years with revenues locked in for the next 5 years
  2. a start-up with an untested management team, dubious business plan and volatile revenue stream
Of course, the right answer is 1).
So, while earnings are important, don’t forget to focus on risk as well. They both play an important part in the value equation.

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When the time is right, how will you exit your business?

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by Kelly Deis of SoundPoint Consulting

Retiring from your own business isn’t as simple as calling HR and telling them you are ready to go. How exactly does one leave their own business for the good life? Here are a few options.

You started your business 10, 20 or even 30 years ago. It has been good to you. You’ve built it from infancy, fed it, grew it and, in turn it has provided you a comfortable lifestyle.

But, you’re done, or you want to be done. You are ready for the good life that retirement promises. But there is only one catch – there is no playbook for retiring from your own business.

As a business owner, there are several options available to exit your business. Here are a few…

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The 3 Pillars of Business Value

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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.

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Options in selling your business: asset vs stock sale.

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by Kelly Deis of SoundPoint Consulting

So, you want to sell your business. For most of us, it is a once in a lifetime event. There is no reason to expect that you should know the intricacies of a transaction.

That is why it is oh so important to have good advisers help walk you through the process.

One of the fundamental decisions you will need to make is whether the transaction will be an asset or stock sale. It will depend upon your individual circumstances as well as your business structure.  Continue reading →

Do you think you might want to sell your business?

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The Value Gap

by Kelly Deis of SoundPoint Consulting

business for saleHave 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.

The value gap is the difference in price between what the seller thinks his/her business should sell for and what a buyer is willing to pay for it. Bluntly, it is unrealistic expectations on the part of the seller.

Sadly, it is one of the bigger reasons why deals go awry in the lower-to-mid market tier. And, it can be avoided.

Causes of the Gap

There are a variety of reasons why a seller may think that their business is worth more than what others are willing to pay for it.

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Selling your business? Timing is everything.

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by Kelly Deis of SoundPoint Consulting

Owners want to sell their businesses for for a variety of reasons – some want to retire and others are ready to move on to something else. Most owners ask – “is now a good time to sell?” Not surprisingly, the answer is, “it depends”.

Here are three factors to consider when timing the sale of your business. Of course, it is best when all three are optimally aligned, but that is not always possible.

The State of the Owner

The owner is critical to the success and ultimate value of a business. Typically, once the owner is beyond his or her prime, the business value will begin to falter.

It is best to sell when the owner is engaged, still excited about the business and perhaps wiling to stay on after the sale. Likewise, the more youthful and healthy the owner the less they will appear eager to sell.

You want to be the owner that wants to sell, not one that has to sell.  Continue reading →

How much is your business worth?

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It’s not all about the bottom line.

by Kelly Deis of SoundPoint Consulting

Most business owners focus on increasing profit margins as the only 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.  Continue reading →