Business Valuation for South Florida Businesses
Serving Miami, Fort Lauderdale and Palm Beach
Business Valuation – A valuation is not about determining what a company is worth in the current owner’s hands, it is about the company’s transferable value. Each value driver is a characteristic of a business that either reduces the risk associated with owning the business or enhances the prospect that the business will grow significantly in the future.
The Following All Influence Your Business Valuation
Stable and Predictable Cash Flow
Think of revenue and the bottom line cash flow of your business as the first introduction to a buyer. Revenue and cash flow is the number one attraction. A company that has a good track record of continued growth will always command a higher sale price.
The most important factor in buying an established business is – will it remain “established” after I buy it? The ability to retain, or increase, the current cash flow is a major risk factor. The market valuation of a business is largely based on the money it generates.
If your company relies heavily on recurring revenue, that recurring sector of your business will be valued higher than the seasonal or non-recurring sales history. Recurring revenues are major goal of today’s industry model, especially in online businesses.
They could be anything from lawn care or pest control maintenance contracts, annual patent license renewals, subscriptions – virtual/online and real world like magazines and periodicals. Recurring income is the creation of a continuing income stream and is the goal of most businesses today.
Reliable Financial Information
Reliable financial records are not only a critical element of business management but also support the claim that a company is consistently profitable. In the purchase of a business, the buyer will perform some level of financial due diligence.
If the prospective buyer is not impressed with the business’ financial history, he will either walk away or offer a lower price. This would reflect his opinion of whether he could improve the bottom line or it’s not worth the effort.
If a buyer faces a seller of a business who asserts that the company has been making $1 million per year for the past three years and is projected to make at least that much in the future, the seller will be required to prove it.
If the seller provides prior financial documents that erroneous, without supporting materials, or not complete, the buyer will instinctively “smell a rat” and move on. A perception of lack of integrity with financial records on the part of the seller is among the commonest reasons for a deal going sour. An experienced Miami Business Broker is experienced in discerning fake documents from the real ones, in the Miami / Fort Lauderdale / Palm Beach area.
A broad customer base in which no single client accounts for more than five to ten percent of total sales helps to insulate a company from the loss of any single customer. It reduces the risk of serious cash flow issues if one or more customers do not stay under new ownership.
Human Capital / Quality of Workforce
Keep your talent, they are your business. Buyers look for situations where management and / or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge, is also considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset.
If a business’ success is due more to a great staff than a single, charismatic leader (the owner), a change in ownership should have no impact on continued success. The staff would than be an integral asset of the business, and this factor could affect the selling price. Your main concern would be to win over, and retain the staff.
Whenever a business owner can display viable opportunity for growth, and the reasons why it will grow, the business will fetch a higher sale price. “A documented growth plan demonstrates the viability of the company’s future and may identify opportunities that a buyer had not considered.”
Some areas to consider in developing a growth plan:
- Is your business in a growth industry?
- Are there additional markets that a new owner should pursue?
- New products that could have a market with the existing customers base?
- Where are the best profit margins realized and can they be expanded?
- Can your technology be licensed?
- Can an increase in population affect as positive growth in demand for your product?
- How will a highly effective marketing approach and sales team affect growth?
- Are there opportunities to grow through acquisition?
- Is it possible to expand your territory or increase your product output?
Operating Systems and Procedures
“The establishment and documentation of standard business procedures and systems demonstrate that the business can be maintained profitably after the sale.”
These systems may include computerized or manual routines used to operate the business and to generate revenue and/or control expenses.
It can include ways of tracking customer ID’s and how products & services are shipped.
Examples of business systems that enhance business valuation
- Personnel recruitment, training and retention
- Human resource management (an employee manual)
- New customer identification, solicitation, and acquisition
- Product or service development and improvement
- Inventory and fixed asset control
- Product or service quality control
- Customer, vendor and employee communication
- Selection and maintenance of vendor relationships
- Business performance reports for management
Facility and Equipment Condition (Business Valuation)
Maintain your premises at showcase level when preparing to sell. If your facility is disheveled looking when a prospective buyer shows up for an inspection, it could be cause for that prospect to submit a lower offer, or lower an offer already made, prior to viewing your facility. .
If a prospective buyer sees your facility in a poorly maintained state, he may wonder if the every aspect of the business is in similar condition, ie, financial records, employee information and records of code compliance, etc.
Owners of a business being offered for sale should devote all needed resources to the maintaining the visible aspects of the business – the building or office, equipment, grounds, etc in prime condition. This part of the process closely resembles selling your home.
A business in good physical repair represents less secondary investment in repairs and upgrades. And, lastly, the buyer is interested in the size of the facility and equipment for envisioning future growth of his new enterprise.
A buyer does not want to have to look for additional space or immediately invest in new equipment shortly after closing.
Not all brokers are professional valuators. in Miami, there is a different business model. Finding an experienced Miami Business Broker that can do accurate valuations of Miami based businesses is essential.
This value enhancer involves stability and consistency. Brand name recognition, customer awareness, company track record, current operations, and the company’s reputation all figure in business valuation and influence the selling price. Even if the company does not have many hard assets, customer relationships are vital. The fact that customers have purchased your product over time carries a lot of weight.
Your company, or brand’s good reputation, record of good service and a high level of customer/client satisfaction are major (non-tangible) assets in the valuation of the business for sale, and lessens the perception of risk in the purchase.
Barriers to Competitive Entry
Features that give a business an advantage over its competitors, strengthen its strategic position, or that can be leveraged for future gain boost value and lessen perceived risk. Buyers will pay a premium for a niche that has barriers to competitive entry. One way to describe this Barrier Business Valuation Driver is to use Warren Buffet’s term, “Business Moat.” Buffet compares a castle’s moat to the protection that a business needs to encroaching competitors. For instance, the wider the moat, the more easily a castle could be defended.
A narrow moat did not offer much protection and allowed the castle to be breached. To Buffett, the castle is the business and the moat is the barrier that protects the business’ competitive edge. The following are example barriers that widen the moat and hinder competitors from breaching the company’s castle.
- Trade Secrets
- Developed Processes
- Proprietary Designs
- Proprietary Know-How
- Brand or Trade Names
- Engineering Drawings
- Customized Software Programs
- Step-by-Step Training Systems
- Customized or Proprietary Databases
- Published Articles or Industry Press
- Difficult licensing, stringent zoning requirements, business permits, or regulatory approvals
- Exclusive government contracts (for example). Competitors would first have to get through the barriers of contact presented by secretaries, office managers, personal assistants, etc. whose job is to filter and qualify unsolicited contacts.
A narrow product set increases risk and drives down value. Diversity of revenue sources lowers the inherent risk of the business. Hence, a business with a good variety of products, good bottom line, or has a product line that supplies multiple industries will have a higher “Business Valuation” and higher acceptable sale price to the sale’s prospects.