My business valuation clients are frequently surprised by the in-depth analysis required in order to do a business valuation. The classic statement of business value is the “present worth of future cash flows”.
This statement requires determining two key variables: 1) a good estimate of future cash flows, and 2) an appropriate discount rate that is calibrated based on the risk of receiving those future cash flows.
Determining these variables requires an understanding of the following: 1) The Subject Company’s market, 2) Its position in that market vis-à-vis its competitors, 3) The industry in which it operates, 4) Technological changes in the products/industry which can be reasonably foreseen, 5) The organizational/management structure of the Company; and 6) Changes in the economy that will affect demand for the Company’s products and services.
Analyzing these issues is where the real complexity of business valuation lies.
We have recently begun using a new software tool called CoreValue® to assist in this type of analysis. CoreValue® uses a framework of the following eighteen “Value Drivers” to analyze the business:
- Size of Potential Market
- Market Share
- Recurring Revenue
- Barriers to Entry
- Product Differentiation
- Margin Advantage
- Customer Diversification
- Company Overview
- Financial Strength
- Sales & Marketing
- Customer Satisfaction
- Senior Management
- Human Resources
- Legal Condition
Three factors make this tool unusually helpful.
1) The software uses a database of thousands of actual business sale transactions in a wide range of industries to evaluate how different business characteristics affect business value.
2) The software designers have developed a series of algorithms that correlate business characteristics with business value.
3) The relevant information about the business is developed in an interview format with the business owner(s) using a series of 6 – 10 questions in each of the eighteen areas described above. This makes the business owner an active participant in the process and the business owner ends up learning a great deal about his or her business.
The result of the process is an analysis of each of the eighteen areas so that the business owner can see how the value of the business is affected by the strengths and weaknesses in each of these areas. It also allows the business owner to develop a plan to focus on those Value Drivers that will result in the biggest increase in business value.
I have performed a CoreValue® analysis on businesses for which I have done a traditional business valuation analysis. I am confident that it can be helpful to any business owner. Contact me if you’re interested in implementing CoreValue® analysis on your business.
Join me as I discuss other business valuation and succession planning issues online on May 1, 2014 from 11:00am – 12:00pm. The free webinar is called, “How To Leave Your Business In Style.” [button]Click here[/button] to register to attend the webinar.