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company valuation

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7 Min Read

Valuation is the Greatest Indicator of your Business’s Survival Timeline

Entrepreneur vs Technician ImageBusiness survival timelines are calculated from valuation scores that are based on 10 year increments of expected rates of return. There are no absolute survival timelines, as there are no guarantees that a buyer will pay the exact amount of your valuation. These valuations are based on multiples of EDIT or EBITDA, plus or minus 7 risk factors. The lower the risk, the higher the price – the higher the risk, the lower the price – because the risk factors are all based on a minimum of 10 years of sustainable profit.

If you have a Value Builder score of 80% to 100%, that means your business has an 80% to 100% chance of profitability for another 10 years. A score of 60% to 79% indicates a 60% to 79% chance of profitability for another 10 years. Likewise, as your Value Builder score diminishes to 50%, 40%, 30% or lower, your profitability also matches that downward trend. Therefore, it stands to reason that if you plan on keeping your business profitable for another 10 years, you absolutely need to obtain a score of 80% or more.

In order to increase the scores of each of the 8 drivers of company value we prioritize action plans that focus attention on increasing those scores as quickly as possible. In the process, key employees learn to think like entrepreneurs. Entrepreneurial thinking creates new opportunities, frees up time, increases financial performance, and retains good employees. The result is significant increases in equity to show for the owner’s training investment. Most owners think like technicians and work in the business as a manager, over-seeing how the business is doing. This is a problem.

But the entrepreneurial thinking owner creates a business that can run without them having to work in the day-to-day operations and could be sold for 6 to 16 times earnings. The results for both types of owners in both cases are predictable. The statistics are that 90% of businesses cannot be sold and won’t be as profitable out another ten years.

An entrepreneurial run business can survive indefinitely or can be sold for 6 to 16 times earnings – what a difference! Ninety percent of businesses eventually liquidate, leaving the owner with only the money they earned working in the business. The end result is the technician/manager owner has accumulated debt, the business depends on the owner, and the owner has little equity to show for the investment of the their time.

Some owners think they can just turn their businesses over to someone else. But if that person messes it up or gets sick, then what? The business owners that I have met who made that decision tell me it is even worse than you can possibly imagine. What happens then is the bank doesn’t want to loan any money or taxes aren’t paid or vendors put the owners on a cash basis, this leads to bankruptcy.

The more successful way, is learning to think like an entrepreneur. Once people learn how to develop all the procedures into training tools to teach others, the business runs better from both the bottom up and the top down. The skill of the entrepreneur is not a natural skill, it requires training tools. Some owners don’t want to learn, so they don’t qualify. But, those that do, begin to see results for their efforts sooner. Results may not occur right away, but do occur over time. There are still fires to put out and problems to solve. But over time, the fires stop and the problems become less important as employees follow systems and are trained to perform at higher levels.

At Holt, we have developed training and coaching skills to train owners along with employees to think creatively, like an inventor – this is a process of discovery. There is no doubt work still has to be done, but, by giving people time to develop systems innovation knowledge, to be creative, something profound happens, they get more passionate about their work. The essential by-products are: the work gets done more efficiently; employees get motivated; and there is viable evidence the business is more sustainable, with higher business valuations! Why? Because progress is measured frequently, so results are proven.

Because entrepreneurial owners and employees are getting more qualified sales, capacities increase because people do not leave and net profit increases dramatically over the next 10 years; because people are better trained than they are now.

Just so you know, our process is simple! When we meet with you we will conduct a quick needs analysis, discuss the products and/or services that would best fit your specific situation and give you a FREE written quote.

 

Topics:   company valuation

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