The true value of a business is certainly not just based on its annualised net profits, but more to the point, it is a multiple of the aggregated value of its component parts.
Businesses that are willing to put in place and implement the following practices and procedures will be rated as far more valuable than those that don’t, such as:
- Up to date minutes of meetings of the board and/or the executive management teams
- A 3 year achievable business plan
- Tight financial controls and cash flow management
- Cost effective debt structures (if applicable) and effective and ongoing collection of its debtors
- Strong operating systems
- Properly registered intellectual property rights
- Effective tax and cash-flow management systems
- Well drafted employment contracts with proper restraints of trade in place
- Properly constructed and commercially sound leases, licences, distribution and supplier agreements
- Strong management teams in place with effective reporting guidelines for all employees and bonuses and reviews measured against realistic targets and actual results
- Clear and express guidelines as to culture and the ethos of the business
- It’s social media profile
Where it is the case that the business rates poorly, its value may be say a multiple of between 1.5 and 2 times the net profit.
However, where the business rates highly against the above-mentioned criteria, its value may be say a multiple of 6 or 7 times its net profit.
If the net profit (before tax) of the business for the year ended 30 June 2021 was say $2.5 million, a well organised and efficient business may be valued at a multiple of say 6 times $2.5 million, totalling $15 million.
However, if the business was not as effectively managed, even if it still earned a net profit of $2.5 million for the year ended 30 June 2021, its value would only be a multiple of say 2 times the net profit of $2.5 million, totalling $5 million.
The difference in value could therefore be as high as $10 million.
If you are too busy running your business to effectively implement the criteria detailed above, please give me a call.
It could be worth a multiple of millions of dollars to you.