DATE: October 08, 2018
There are several ways to accurately calculate the value of a business you intend to sell or buy. Many scenarios—on and off the balance sheet—can negatively or positively affect valuation. The valuation of your business is determined by a combination of Cash Flow Factors and Risk Factors.
Below are specific takeaways you can immediately implement to increase valuation while also reducing risk.
PART 1: Cash Flow Factors that Impact Your Valuation
1. Know Your EBITDA
Nearly all businesses are valued on a basis of EBITDA, serving as a measurable proxy for cash flow.
2. Identify Owner Expenses
Many business owners incur expenses that will not continue under new ownership. Quantifying and
validating these expense items leads to enhanced value capture for a seller.
3. Reduce Capital Expenditures
All else equal, companies with high CAPEX requirements trade at a lower multiple than those with little to no CAPEX requirements.
4. Control Working Capital
Working capital intensive business models require additional capital to grow, impacting valuation. Working capital typically becomes a valuable negotiating point in deal structure.
5. Entity Structure Matters
The wrong entity structure for your business can create serious issues in your marketability and valuation at the time of a sale. Assuming buyers will acquire the stock of your company without applying a discount is not always a safe assumption.
