Accurate business valuation: In any business, the whole is worth more than the parts, and how to achieve that
When building a business, the goal is to scale and grow and ultimately sell your business. Thus an accurate business valuation is essential.
In some cases, businesses are sold outright with everything they are built on, but in other cases, businesses are stripped and torn down simply because the buyer is only interested in one part of the business that he sees as valuable, which is not a desirable outcome for the owner because he does not receive the actual value of his business.
Listen to this podcast from The Money Show where Pavlo Phitidis discusses valuation and successfully selling your business.
A business that Aurik is currently working with was about to be acquired. However, in the acquisition, the offer they received for the company was way under what their assets were worth and their understanding of the value of the business.
There are 2 key takeaway points which could be seen as red flags in this business:
- Even though their revenues were growing, and they were thriving through the COVID period, their profits as a percentage of revenues started to diminish. The more they grew, the more they started to erode the valuation of the business itself.
- So as the revenues grew, what happened? The costs grew in tandem with the revenues. And when costs and revenues marry each other tightly, very little drops down to the bottom line. And the bottom line, ultimately, is what people are looking for in order to understand whether the growth that they are buying is going to be profitable or whether the growth that they are buying is going to be trouble.
For a successful business sale or exit, start at the end and imagine yourself as the buyer; this may help you with business valuation. Grasp the mechanics of business valuation and simply construct a business to demonstrate those mechanics. A few key elements to consider are:
- Determine the journey and how many years it will take you to get out of the business.
- Define the product.
- Determine brand positioning for the company in order to understand the end consumer.
- Look at your business in terms of customer groups and understand that businesses are 99% psychology and 1% product, not 99% product and 1% psychology.
- With the changing times in business and valuation, brand building is key to a good valuation for your business. A brand is your perception of a product or a company. And an experience is created, yes, in part by the product, but mostly by how that company behaves towards you. That is the key.
Build a coherent business where the sum of its parts far greater than the whole.