I hate to use clichés but when they help clients to understand key concepts that can get lost in technical details – I’ll use em! No pain, no gain; no guts, no glory – are ways to describe the risk vs. return decision. Investors have choices in how to invest across a wide spectrum of assets. An informed, practical, and astute investor will evaluate their risk and return options in terms of what makes sense for their objectives.
Whether appraising a public or private enterprise the primary value drivers for a business are growth, margins, and risk. Growth and margins usually receive the most attention because they are easier for business owners to understand. Both can help create higher cash flow and higher business value. A buyer will look at an investment to gauge what future return they can expect for the money they invest today. The key words are “future” and “expectations.” The buyer’s perceived risk of his investment is vital for the seller to understand. A buyer will pay more when expectations look less risky.
Yet risk is often overlooked by would-be sellers and kills many deals. Business risk can have many dimensions ranging from product or customer concentration, key person reliance, unstable workforce, questionable financial records, old equipment, poor use of technology, to name only a few.
There isn’t a boilerplate remedy. However, a seller needs to weigh his or her time horizon and objectives before attempting to attract investment or sell the business. Increasing growth and margins may require more resources (time or capital or both) and more risk. Whereas, risk reduction measures may be less costly and more within your control, such as an employee retention program or getting your financial records cleaned up.
Therefore, having your business appraised by a qualified appraiser, well in advance of going to market, is highly advised. You will gain perspective and can better plan and prepare your business for the next phase – whether that is maintenance, growth, or future sale.
Jerry Matecun helps business owners to discover key planning and investment considerations vital to build and protect the value of your business and personal assets. For a no cost, confidential conversation regarding your business valuation and exit plans call or email Jerry at 949-273-4200, 616-499-2000 or firstname.lastname@example.org.