Other Than Profitability, What Else Can Make My Business Valuable?
Written by Marissa B. on December 15th, 2020
Say! Yes Enterprises works hard to educate business owners and investors about valuations.
When all parties understand valuations, acquisitions happen much quicker and easier. Accurate and fair valuations create a win-win situation for everyone.
Beyond the basic valuation formulas, there are intangible assets that can increase or decrease the value of a business. What are some of the non-traditional valuation drivers?
Owner’s Time Involvement (Also Known As The Seller’s Time Involvement)
Number of Employees
Investors want to see that the processes that churn out profits are repeatable and sustainable. Of course, it is an unnecessary expense to have too large a number of employees, but it is also a value detractor to have too few employees.
Oftentimes, the workflow is faster and more efficient when there are more employees. The fewer employees a business has, the more dependent the business is on those employees. This presents the same problem for investors as a business with too much owner time involvement.
For example, suppose an investor has purchased a multi-million dollar architectural firm that only has three architects. Within a month of the acquisition, one of the architects leaves the company for a better job offer, and another goes out on a long sick leave. Now, there is only one skilled employee, who cannot handle the workload alone.
The investor either has to learn how to be an architect or spend valuable time and money hiring new architects. The investor will have to sacrifice time that could be spent more profitably. If the company had five architects to start with, losing two people would not require the investor’s urgent attention.
Income and Expenses
Investors want to see data to support the idea that a business has a history of making money, is currently making money, and will continue making money. Profit is a very important component in valuing a business, but this number just scratches the surface.
In addition to profit, revenue is also a strong consideration. Beyond the dollar amount of revenue for a certain year, income and expense sources are also studied to see the true value of the revenue. For example, revenue of $5 million for a software company seems great. However, where is that money coming from?
What if this hypothetical business made $4 million on a single contract that is ending in a few months? The other million dollars in revenue came from 200 customers, the most expensive of which paid $10,000. In that case, the high revenue is highly dependent on a single big-ticket client. After that client’s contract is up, the business would likely go back to making $1 million per year.
Profit also gives great insight into a business’ expenses. What if a business has higher revenue than is expected for the industry? On the surface, that is great. Upon deeper examination, what if that business makes more revenue because expenses are reduced by a vendor contract with the current owner’s relative who extends a generous family discount? The discount may not apply to the new owner.
As these examples show, finances are a treasure trove of data. Oftentimes, taking a deeper look at income and expenses yields positive results for both the business owner and investor.
Marketing
While marketing is not part of any valuation formula, a great marketing process can make a business far more valuable. All businesses need customers on a continual basis to stay profitable. Investors make more money with less stress if an acquisition already has a powerful, consistent process for bringing more customers in.
Does your business send out flyers or emails? Do you run print or radio ads? Do you know what forms of marketing bring the highest return on investment for your business? Do you have data about the sources of traffic (online and offline) that are bringing in the most customers?
These answers are valuable. Altl of the numbers and processes that go into marketing are important to assess the health of the business. A concrete marketing process makes a business more valuable.
SYE commonly assigns a higher value to businesses with robust email lists, social media followings, or valuable Google keyword data. All of these intangible value drivers are priceless when it comes to building future marketing campaigns that will grow the acquisition.
You do not need to guess about what your business is worth. Let the experts at SYE discover all of the non-traditional value drivers in your business. Sign up for a free valuation today by filling out our website form or emailing inbox@sayyesenterprises.com
About Say Yes! Enterprises
Say Yes! Enterprises is an investment management company that acquires, builds, and sells companies that benefit shareholders, customers, team members and communities at large.
About Christopher Wick
Investor, 9X Award-Winning Entrepreneur, and 5X Best-Selling Author & Speaker
*Founder/Principal of businesses that have been featured by Huffington Post, ABC, NBC and Wall Street Select*
Christopher Wick is an award-winning entrepreneur who has built, bought and sold various companies relating to social media marketing, e-commerce, real estate, retail and investing.
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Say Yes! Enterprises is an investment management company that acquires, builds, and sells companies that benefit shareholders, customers, team members and communities at large.
Say Yes! Enterprises is an investment management company that acquires, builds, and sells companies that benefit shareholders, customers, team members and communities at large.