Manage, Market, and Measure Business Valuation
If you are a business professional, chances are that you’ve heard of Shark Tank. The rags-to-riches investors tell it like it is, pulling no punches, but also make dreams come true.
There are 6 things that the Shark Tank Investors look for before they will invest in a company:
- A Business Model that has Proven to Return Recurring Profitability
- Long Term Growth with the Potential of Longevity
- High Profitability of 20-30% or More
- Sale and Marketing in Place to ensure driving Continued Profitablity
- Is Management in Place to Maintain and Improve the Business Models Performance
- As Kevin O’Leary says: “The Three Most Important things for a Business are Cash Flow, Cash Flow, and Cash Flow!”
Free Cash Flow is a moving target that demands constant systems evaluations and innovation that keeps everyone focused on the right issues, helps see risks, and helps you separate winning systems from losing systems. As you can see, free cash flow and discounted cash flow try to work out the value of a company today based on the projections of how much money it will make in the future. The basic idea is that the value of any company is the sum of the cash flows that it produces in the future, discounted to the present at an appropriate rate. Increasing business valuation ideas are shown below:
Examples of proven successful strategic reinvestments that increase valuation include:
- Developing New Products or Services
- Creating New Market Methods
- Expanding to New Geographical Areas
- Developing New Distribution Channels
- Innovating Existing Systems
- Executing Mergers and Acquisitions
- Developing a Strategic Plan with New Initiatives
- Innovating Your Current Business Model
- Implementing Total Systemization
Case Study
I have a client company that had been in business for over 60 years. The owners had been taking out substantial draws for many years. The company was forced with a down-turn in demand for their services and products. Through research, we developed a new division that was similar to the core business but had a totally different customer segment. The investment to start-up and operate the first year was $400,000. At the end of the first full year, the new division generated $100,000 in net profit. The second year net was $300,000 and the third year was $600,000. In total, the $400,000 investment returned $1,000,000 over three years or 250% versus cash value loss if not reinvested.
This is a real-life example of one of the methods I have used to assist client companies to increase their value. I have accomplished the same value increase in companies that I own. As the owner of a small business, I had taken the recommendation of financial experts to invest part of my company profits in the stock market. This recommendation worked well throughout the Ninety’s and by 2000 I had more than tripled my investment. However by 2008, most of the gains were lost as the market came down; especially in 2008. After calculating my tax estimates on IRAs, it looked to me like I would have been better off reinvesting those earnings back into my own company in ways that allowed more control than in the stock market.
So I changed my point of view, to looking at my businesses as if I were going to sell them at a good profit five years from now. I invested in a new business. In the fourth year, the new business’s net profit was 25% of my original investment. The next three years are budgeted to return over 30% per year. From start up to seven years, the return should be 115%. However, the really good news is the valuation or sale price will be well over a 1000% return if I decide to sell.
Learn more about selling a business here.
If you would like to learn more about business valuation methods that would best suit your business, contact Holt Marketing and Management Services. There is no obligation, and one 15 minute call could increase your valuation by $1,000,000 or more!
