The value of your business needs to be monitored on a regular and consistent basis.
A company's valuation is based principally on its ability to generate future cash flows. The first concept that should be emphasized in this principle is future.
Historical earnings only serve as a predictor of what should happen in the future. The second concept that needs to be highlighted is cash flow. So many business owners are fixated on metrics like EBITDA or net earnings, but the true determinant of value is cash flow, which takes taxes, changes in working capital and capital expenditures into account. This is a subjective task to say the least, but it's necessary to validate the value of a business. Good historical information will serve as support for the assumptions used in these forecasts.
Market forces tend to drive the rate of return required by prospective buyers in the marketplace. These market forces include:. What This Means for Business Owners Keep vigilant watch over these market factors to determine when the time is right to maximize value on exit. A buyer may be willing to pay more for Company A for two reasons:.
If you are in an industry that is not capital intensive, find ways to support the valuation of your goodwill. The transferability of a business' cash flows to a potential purchaser will impact the company's value. It is well-documented that valuable and salable businesses should operate without the owner at the helm.
Principles of Valuation | International College of Management, Sydney
The concept of transferability is closely tied to this advice. If the owner is a big part of maintaining relationships with customers, delivering quality service, driving revenue growth, etc. This personal goodwill is not transferable, and has little or no commercial value. In this instance, the maximum value of the business to a buyer may be limited to the value of the tangible assets if the owner is unwilling to stay.
Are you able to leave the business for extended periods of time and feel comfortable that it will run as efficiently or even better than if you were there? Week 1 - Module 1 In module one, we will introduce the framework of time value of money TVM in a carefully structured way, using relatively simple applications.
Timothy J. Feighery, Christopher S. Gibson, and Trevor M. Rajah
Week 2 - Module 2 We will build on Module 1, and move quickly to more advanced applications of TVM focusing on situations we confront on a daily basis. Week 4 - Module 4 We will wrap up the course by exposing you to the key determinants of cash flows using accounting principles. Week 5 - Module 5 This week will be spent on a short wrap up video of the course and time for assimilation and review by learners to be prepared to take the final exams. Week 6 - Module 6 This is finals week.
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