Small Business Valuation and Its Benefits

If you watch the TV show Shark Tank, you often see business owners who lack an understanding about small business valuation. It is estimated that over 80% of small businesses have no financial estimate as to what their business is worth, nor do business owners seem to care. This is like me asking you how much money you have in the bank and you have no idea what I am asking you. You would not run your personal financial life this way; so why would you run your business with no understanding of the value.

So why should small business owners care about valuation? The answer is simple: The personal wealth of every small business owner is directly linked to the valuation of their business. If you expect to be worth a million dollars, then you better have a business that has a valuation of one million dollars. This is important because at some point every small business owner must retire and your retirement is based on the value of your business. Consider the fact that 70% of private companies in the United States will be put up for sale by 2030 and according to the National Federation of Independent Business, only 30% of all businesses that are put up for sale are sold. This is because most small business owners never pay attention to the valuation of their businesses.

Where does valuation come from? Valuation gets assigned based on the benefit stream of your business. The most common benefit stream is Earnings Before Interest Taxes Depreciation and Amortization or EBITDA for short. When you go to sell your company and retire from your business, you will sell your company for a multiple of your EBITDA. The bigger the company, the higher the multiple and the higher the valuation. The key is to get the multiple up which will increase your valuation. This requires an aggressive growth strategy linked to the valuation of your business.

The good news is that financial professionals are now offering cloud based solutions that empower any small business owner with a road-map for increasing value. The bad news is that this road-map can take five years or more to implement. Additionally, most road-maps require a strong professional team to facilitate the process. Having worked with various solutions, I would recommend small business owners consider one of two solutions:

1. Value Opportunity Profile – This is a comprehensive assessment of your business based on interviews with your management team. Specific recommendations are made on how to increase value in three phases.

2. Value Builder System – This is a 12 month program that starts with your own self-assessment, allowing you to decide if you want to embark on the program or not. Exercises are used each month to improve the valuation score of your business.

Regardless of how you get there, it is imperative for every small business owner to recognize how important valuation is to their own personal wealth. Because so few owners seem to grasp valuation and how to increase it, having a professional outside team can help. You need someone to orchestrate and facilitate the process while everyone else runs the day-to-day operations of the business.

5 Valuable Ways Business Funding Will Scale Your Business

Most businesses think that business funding is something that you need when your business is short on cash or times are hard. A lot of businesses go out looking for business funding when the business is not good. The time to get business funding is not when your business is doing horrible or you are strapped for cash.

If your business is doing great, there is no better time to go out and get business funding. Why?

1) It’s easier to qualify
2) You can get better rates and terms
3) It’s easier to grow your revenues with a capital infusion
4) It’s easy to utilize the simple formulas that we have in here to scale your growth.

DON’T WAIT FOR THINGS TO GO BAD; IF YOU ARE DOING GOOD – BUSINESS FUNDING CAN SCALE YOUR BUSINESS TO THE NEXT LEVEL.

This is how you can determine if business funding can help your business grow. There are 5 simple steps which will show you the value of business funding.

Step 1: What Do You Need To Grow Your Business?

While this may sound like a stupid question, it is a very important question.

The FIRST STEP you need to take is determining what your business needs to grow sales. Most businesses need one or more of the following?

• Inventory and More Products
• Expanding Existing Line of Products
• Adding Additional Services
• Marketing and Advertising
• Sales People or Personnel
• Machinery, Equipment, Software or Hardware
• Expanding into other Territories or Adding Another Location

Step 2: How Much Money Do You Need to Achieve That?

How much money do you need to achieve that? Again, another simple question and it may sound stupid. But you need to start off with basic questions.

How much would you like to invest into your business or how much do you need to grow your business?

$10,000, $20,000, $40,000, $50,000, $100,000 +

Step 3: Where will the come from?

There are only three forms of cash that flow into a business:

REVENUES FROM SALES
INVESTMENT DOLLARS
DEBT: A LOAN OR LOANS

Where will the money come from to help your business grow?

If you have an existing business and you want to invest in your business you either sell more or you have great close out balances and have enough reserves to re-invest. If you plan on selling more; most sales and marketing strategies require some sort of cash infusion. If that is not the case you only have two options: an investor or a loan.

Step 4: If you had the amount of money you need to do what you want in your business – there are two key questions: If you know the answers to these two basic questions; you will know immediately how to increase your sales fast.

1. How much money will you make with that money?

In technical financial terms – What will be the ROI (Return on Investment)?

2. In what time frame will you make that money back?

In what time frame will you achieve the anticipated or projected ROI (Return on Investment)?

EXAMPLE (CASE STUDY): (Simple Version)

If someone gave you $100,000 – what would you do and how would that impact your business.

Example:

I (YOUR NAME) would take $100,000 and allocate that money into marketing and increase personnel. (NEED AND WANT)

I (YOUR NAME) would take $100,000 and make 50% return in 5 months. The equivalent of 10% return per month…

Based on this information, you are clear on how you would use the money, what type of return you would make and in what time frame.

The next step; is to determine if you can?

• Increase sales to $100,000 and have the extra money to do this.

• If you obtained an investor how much would they want? Most investors will either charge you anywhere from 10% to 30% in interest or they will want 20% to 50% of net earnings. You have to figure out the cost of capital versus your return.

• If you obtain a loan the interest rate may range from 7% to 30%. You need to factor in the cost of capital versus your return.

EXAMPLE (CASE STUDY) – Crunching Numbers:

For Existing and Operational Businesses

Food Distributors of America currently generates $50,000 per month on an average. At the end of the month they close out $5,000 positive which is about 10% net. Currently, there cost of inventory is $20,000. This means every month they purchase $20,000 to make $50,000 Gross. The question you need to address is: How much are my costs to generate gross earnings? Once you know that, you know how much you need to increase gross earnings by 10%, 30%, or even 100%. In this example, we can increase earnings by 100% by making a capital infusion of $20,000.

We know that $20,000 generates $50,000 per month. We know that $20,000 and $50,000 of gross sales generates $5,000 per month net; which is 10%. They want more inventory because they have prospective buyers.

Conclusions:

• An additional $20,000 would generate an additional $50,000 in gross sales; increasing earnings to $100,000. This is a 100% increase in gross sales.

• An additional $20,000 would generate an additional $5,000 in net margins; increasing earnings by another 10% monthly = 20% monthly.

• If this business can do this every single month, they would increase net earnings by 10% x 12 months = 120%.

Not all businesses can do this. Even if you increase your net earnings by 2% per month = 24% increase in 1 year.

Businesses that carry inventory have an easier time achieving this.

Businesses that sell every day; such as restaurants, hair salons, and anyone who sells consumer products; have an easier time achieving this.

Seasonal businesses can also achieve these types of returns.

Step 5: Calculating Cost of Capital versus Return on Investment (ROI).

If you don’t have the extra money; you will need an investor or some sort of business funding or a loan.

There is nothing wrong with taking on investors or a loan. Most successful businesses have grown with capital infusion. Think of this way. Would the New York Stock Exchange or would the Chicago Board of Trade exists if businesses did not take on investors or debt? All businesses on major stock and debt exchanges have investors or debt.

How do you calculate ROI and Cost of Capital? Easy as 1, 2. 3.

Let’s assume you are able to obtain a loan for $50,000 to invest in your business. You project that you will make 5% return per month for the next 5 months = 25% return. Let’s assume you get a loan with a 12% annual rate = the same as 1% per month.

5% per month (your return) minus 1% = 4% your new return
4% x 5 months = 20% (after cost of capital)

The interest rate on a loan is important. However, if you know how to make a Return on Investment with a loan you will WIN in the end. More important, this is known as OPM (Other People’s Money). Making money with other people’s money! Read the Art of the Come Back, by Donald Trump. Do you think Donald Trump, Warren Buffet, and others utilize their own money to make money? The answer is NO.