How to Value a Business
Nov 18, 2024Shannon begins by emphasizing that traditional valuation methods, focused on cash and assets, are limited. This is like saying the Earth is flat—it overlooks the larger picture of a business’s potential. When selling a property, you consider not just its current state but its future potential. Apply this same thinking to your business.
The true value of a business lies in the buyer’s perception. Your business is worth what someone is willing to pay for it. To maximize this perceived value, think like a buyer. Is your business well-structured? Does it have recurring revenue? Reducing buyer concerns about risk and showcasing stability can significantly boost your business’s worth.
Shannon highlights that you’re not just selling your business as it is now; you’re selling its future potential. Buyers aren’t just purchasing current assets but investing in the possibilities of growth and profitability. This potential is often quantified using the net present value (NPV) of future cash flows, which calculates what future earnings are worth today, considering risks and opportunities over the next few years.
Reducing risk is crucial to increasing your business’s value. Buyers are wary of risks like reliance on a single major client or volatility in your industry. A business heavily dependent on something unstable, like bitcoin, becomes less attractive to buyers. Instead, Shannon suggests building a “brick foundation” with steady, reliable revenue streams and well-structured operations.
Recurring revenue is another significant value-builder. It brings consistent cash flow and reduces perceived risk. Shannon points out that businesses with predictable, recurring income are more valuable because they offer certainty. Most buyers would prefer a guaranteed $100,000 over a 50% chance at $200,000. This principle makes recurring revenue a goldmine.
Shannon encourages you to focus on building systems, processes, and teams to enhance your business’s reliability and stability. As you set goals for 2025, aim to increase sales and profits, but also work on fortifying your business against risks.
In conclusion, evaluate your current risks and create a comprehensive plan to mitigate them. Strive to reduce uncertainty and build a robust, valuable business poised for future growth. Thank you for tuning in to Keep What You Earn. Downloads Shannon’s Money Pro Matchmaker guide to get the right support for your business needs.
Until next time, remember that the value of your business is more than the sum of its parts; it’s the culmination of opportunities and minimized risks. Here’s to building a business that truly holds value, now and in the years to come.
What you'll hear in this episode:
03:23 Value is opportunity, not just current assets.
08:49 Reliance creates risk despite cashflow opportunities.
10:01 Lay a strong foundation for business certainty.
If you like this episode, check out:
Why You Should Get Financing Before You Need It
Maximize Profit and Cash Flow (Financial Priority Formula Part 2)
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
