On this episode of Emerge Dynamics, we’re continuing the series about how much your business is really worth, including passing along actions to improve the valuation of your business. It’s important to remember that value is in the eye of the beholder. Regardless of how you calculate a typical valuation, there is always a value in the mind of the buyer and seller.
We like to focus on intrinsic value, which is a function of calculations made of three main components: cash flow, growth rate, and risk. Risk is defined by the likelihood of growth and continued cash flow. The higher the risk, the lower the value. The higher the growth rate and cash flow, the higher the value.
There’s often a disconnect between what a buyer is willing to pay and what a seller is willing to accept out of the transaction. In most situations, a compromise has to take place, in addition to a lot of back-and-forth conversations. A good advisor knows how to close the gaps and help people perceive and understand what gaps can be closed.
Many things you can’t control, like market changes, can influence a transaction. You have to focus on the things you can control. You can set yourself apart by de-risking your company, leading to an exponentially greater outcome for you despite what’s happening in the marketplace.
There are many different goals and outcomes you can consider for your transaction. You want to get the highest multiple you can, regardless of the timing of the transaction or the market circumstances. Customer concentration is important to focus on, along with other strategies you’ll learn later in this series.
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