Valuating a business can be an extremely complex process to say the least. Terms like EBIT, EBITDA, Net Income, multiples and more get tossed around by industry professionals but are meaningless to most business owners. There is a reason why there are professionals that have jobs where all they do is valuate companies. You are not alone in thinking that it is confusing. As a business owner though, it’s common to wonder what the value of your business is and how you can grow that value.
If you want to know the value of your business, pay for a valuation. Now there are a number of avenues to go to get a valuation from paying less than $100 to get a very generic valuation to paying thousands of dollars and getting a very accurate valuation. Really whether you can get by with very generic or you want very accurate or you want something in between is up to you and what you need the number for.
Speaking in generic terms, valuation of a business is based on cash flow and risk. I am sure there are valuation experts that will read that and cringe but even they will eventually admit that a business with great cash flow and very little risk to interruption of that cash flow will get a better valuation than a business with great cash flow and high risk to that cash flow.
Cash flow, often calculated as earnings before interest, taxes, depreciations and amortization or EBITDA for short, is a key performance indicator of a business. There are lots of ways to increase cash flow that might not even really involve your business needing to make more sales. Payment terms to vendors, diligence with accounts receivable, avoiding unnecessary expenses and not making sweetheart loans to owners are a few quick examples that can increase cash flow.
Risk is a much more daunting subject to tackle because this is playing the “What If…” over and over again. Risks range from key employees in operations to over reliance on one customer or vendor to fluctuations in the market to competition to management teams involvement in important decisions to so much more. Really any event that can occur that can impact cash flow is a potential risk.
You can never eliminate risk all together. If a hurricane blows through Grand Rapids tomorrow (you know those February hurricanes we get around here) and levels your business to the ground, your cash flow is going to take a hit and its likely there is nothing you can do to stop that from happening. The goal of a business owner is to eliminate or reduce as many of the big risks as possible. This will not only increase your valuation but it will make your business more desirable to potential buyers.
An experienced Grand Rapids mergers and acquisitions attorney can help you with this process. Running sell-side diligence or developing a value growth plan, can help increase cash flow, reduce those risks and increase the value of your Michigan business.
To find out more, contact a business attorney today.
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