One way to take some of the emotion out of the valuation process is to educate yourself on the factors that influence the value of your business. By understanding the why and looking at your business as if you were going to acquire it, you can have a more objective and realistic perspective on its value.
Quality and Sustainability of Your Earnings. Buyers will look at your historical and projected financial performance, especially your EBITDA (earnings before interest, taxes, depreciation, and amortization) or SDE (Sellers Discretionary Earnings {EBITDA + 1 FT owner operator salary}), which measures your operating profitability. They will also evaluate your revenue growth, profit margins, cash flow generation, and working capital management.
Strength and Diversity of your Customer Base. Buyers will assess your customer relationships, retention, satisfaction, and loyalty. They will also consider your market share, penetration, and potential. A concentrated or dependent customer base can lower the value of your business, while a diversified and loyal customer base can increase it.
Competitive Advantage and Differentiation of your Products or Services. Buyers will examine your value proposition, innovation, quality, and pricing. They will also analyze your industry trends, opportunities, and threats. A strong and distinctive competitive position can enhance the value of your business, while a weak and commoditized position can diminish it.
Efficiency and Effectiveness of your Operations. Buyers will review your processes, systems, policies, and procedures. They will also inspect your facilities, equipment, inventory, and technology. A well-managed and optimized operation can boost the value of your business, while a poorly-managed and outdated operation can reduce it.
Caliber and Continuity of your Management and Staff. Buyers will evaluate your organizational structure, culture, and communication. They will also scrutinize your leadership, talent, skills, and experience. A high-performing and committed team can elevate the value of your business, while a low-performing and unengaged team or lack of team can lower it.