Say you currently have a direct ownership interest in a privately held company. Or, perhaps your company granted you stock options, stock appreciation rights, or some other type of stock-based compensation. Whatever the circumstances may be, you may consider yourself fortunate; but do you really know what your business interest is worth?
It’s a valid – and important – question. Business owners may hear from friends, other owners or internet headlines that companies are selling for 15X EBITDA (earnings before interest, tax, depreciation, and amortization) or 3X revenue. These multiples are uncommon, however, and privately-held companies often sell for much less.
Profitable companies are typically valued based on the cash flow they are able to return to their owners. All else being equal, a company generating more cash flow than its industry peers is considered more valuable.
Business owners who also work for their company have the added responsibility of managing their company on a day-to-day basis, making it difficult to find the time to tackle big-picture business planning issues. Therefore, thinking about ways to increase your company’s value may fall by the wayside in favor of more pressing matters. If you can work the following strategies into your day-to-day management of the business, you can begin laying the foundation to increase your company’s value.
Strive to Improve Your Gross Profit Margin – Each month, scrutinize the gross profit margin generated. Compare your company’s margins to those of other companies in your industry to determine how well your company is performing relative its industry peers. As gross profit increases so does the cash flow generated by the business, which in turn increases its value.
Monitor Your Working Capital – Consider working capital the lifeblood of your business. Monitor how long it takes to collect your receivables and pay off your payables. If a company can collect receivables more quickly than it needs to pay its vendors, it is able to reduce the amount of cash that needs to be tied up in the business. In turn, the company creates greater levels of cash flow available to the owners, ultimately resulting in enhanced business value.
Eliminate or Reduce Unnecessary Expenses – Review your monthly expense reports to determine what expenses can be eliminated or reduced without adversely affecting operations. The lower a company’s overhead, the more profit it will produce for every dollar of revenue earned, which will increase value.
These are just a few strategies to maximize the value of your business. Although most companies do not sell for 15X EBITDA or 3X revenue, if you follow these recommendations, you will create a high cash flow base to which a valuation multiple will be applied. Therefore, focusing on ways to increase cash flow should be top of mind when a business owner wants to maximize the value of his or her business.
For questions about private company valuation or other valuation matters contact your MarksNelson professional.