Business valuations are based on Asset, Income and/or Market Theories. Business Owners and CEOs are encouraged to obtain a baseline value of their business from a certified professional and update the valuation annually. This process will result in a better understanding of the factors that drive value and in a useful measurement of progress.
One of the theories for determining the value of a business is the Gordon Model which can be simplified into the following formula:
Value =
Earnings (the more consistent, predictable and growing...the greater the value)
x
Multiple (the higher the Multiple...the lower the Risk and the greater the value)
Again, this is not the only method, and depending on the circumstances it may not be the best method, for valuing a business. But its simplicity allows us to focus on many key factors that drive value in a business:
What Drives Earnings (Earnings Before Interest, Taxes, Depreciation and Amortization and/or Net Cash Flow To Equity)
What Drives the Multiple (Risk)
Growth in Revenues and Earnings
Consistency of Revenue Stream
Sustainability of Revenue Stream
Growth Rate - Management Depth
- Modern Manufacturing Techniques
- Investment in Technology
- Product Diversity
- Customer Diversity
- Geographic Diversity
- Competitive Position
- Size
- Composition of Assets and Liabilities
- Audited Financial Statements
- Performance Compared to Peer Group
- Liquidity Ratio
- Coverage Ratio
- Leverage Ratio
- Operating Ratio
When Business Owners learn how to move these factors in the right direction they can significantly enhance value, sleep better and increase the probability of an optimal return on their investment.
Heartland Business Exchange, LLC 12949 Granada Lane
Leawood, KS 66209
Telephone: 913-681-9162
Cell Phone: 913-579-6270
Fax: 913-685-4885
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