Tim McDaniel has built a career working with those who are looking to maximize the value of their business. And with 2,500 business valuations under his belt, it’s safe to say he knows what he’s doing. On this episode of unsuitable on Rea Radio, Tim will share three critical factors necessary for increasing a company’s overall value.
- Sustainable Cash Flow – the amount of cash that is readily available to spend, or that someone can put into their pocket after purchasing a business. While the past can be a good indication of the future, we’re more concerned about factors affecting sustainability in the future.
- Rate of Return – reflects how certain you are that the cash flow will continue in the future. It usually varies between 12 and 25 percent. More risk means your business requires a higher rate of return. If all your business is with one customer, this may negatively affect your rate.
- Annual Growth Rate – has a significant impact on valuations, and this reflects the fact that investors are buying future growth. Companies with a higher P/E (Price / Earnings) Ratio have a higher growth rate.
Those looking to improve the value of their business should consider two plans of attack. One should help you increase your company’s cash flow. The second should help you decrease your overall risk. Once these two legs of the stool are balanced, you can move forward on securing year-over-year growth.
Those wishing to exit their business someday are advised to pay attention to their three-legged stool well in advance of retirement. The following points are generally good practice in the business valuation industry:
- A young business owner with a new business can probably wait five years after their baseline valuation to reassess the value of their business.
- Those starting to think about succession planning or exiting, should consider obtaining a new valuation every other year, particularly if the business has more than one shareholder.
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We’ve also included some great resources on our website. Visit https://www.reacpa.com/podcast for articles, past podcast episodes and more.
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official transcript
Click here to read the official transcript for episode 79, “begin with the end in mind: get more from your business valuation.”