Last week we explored business valuation. A common approach is to use comps. Comps look at the selling prices of other businesses that are in your peer group. To use comps effectively to generate a valuation that is meaningful access to good data is important. We want to use comps that are relevant to your business.
When using comps to determine your valuation there are two pieces of data needed – your financials (i.e. profitability) and the multiple, or comp. Good comps require familiarity with both the selling price as well as the profitability of the business.
In general, multiples tend to be set by the market. In a seller’s market multiples increase. In a buyer’s market they decrease. There are things you can do to that may increase your multiple like building scale or investing and training and technology. But in general, the primary way to increase the value of your business is to improve your financials (subscribers: email me to discuss some of the ways we can help substantially increase your valuation by improving both your profit and multiple).
Here are five simple ways to increase your business value.
1. Focus on Gross Profit
Small changes in gross profit can have a large impact on your bottom line. Gross profit is the primary driver of profitability in a business. Declines in gross profit can occur slowly over time, causing the business to underperform relative to peers. If your business is underperforming, not only will your profitability suffer, but likely your relative valuation will take a hit as well.
2. Keep your Overhead and SGA in check
When selling a business, sellers often attempt to back out a whole slew of expenses to justify higher profitability, and a higher sales price. But most sophisticated buyers are naturally skeptical of these adjustments. Expecting to “adjust your way to profitability” will impact your credibility and cause buyers to question other aspects of your business. Maximize your value the old fashioned way – keep an eye on your overhead expenses.
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