by Tony Carter

The goal of every business owner is to maximise the value of their business so that they can achieve the highest possible price on sale. Depending on the nature and size of your business the method of valuation can vary.

Business Type Turnover ($m) Valuation Method Explanation
Micro < 1 Rule of Thumb or Capitalisation of Future Maintainable Earnings (CFME) Large number of industry participants
The sale of these businesses occur frequently
The sale price is known to the broader public
Small 1 – 10 CFME Applies to mature, profitable businesses
Medium 10 – 50 Discount Cash Flow (DCF) or CFME The business is more likely to prepare reliable forecasts
Large 50 + DCF Forecasts are readily available
Shares are liquid and can be publically traded

As can be seen from the above table businesses in the small to medium range are most commonly valued using the CFME method. This method of valuation applies a capitalisation multiple to the adjusted earnings of the business before interest and tax (EBIT).

When speaking with business owners there is a common misconception that their business is worth 3 times EBIT. While this might be true for some businesses, it is not uncommon for businesses operating in this market to achieve capitalisation multiples ranging between 1 to 5.

So what strategies can be applied by the business owners now to help maximise the capitalisation multiple and sale price?
Reliance on the owner

The roles and relationships which are typically taken on by the owners need to be transitioned to the employees so that they remain with the business when it is sold.
Guaranteed Income Stream

A guaranteed income stream will increase the value of the business, whether this is achieved through securing long term contracts with customers or restructuring your revenue so that it is of a recurring nature.
Quality and mix of Customers, Products and Suppliers

Reliance on a limited number of customers, products or suppliers can be a considerable risk for a purchaser to take on. Business owners need to work on diversifying all these areas within their business.

A business is more attractive to potential purchaser if the product or service they offer is unique and their brand stands out from their competition.
Business Systems and Procedures

Ensuring that your business systems and procedures are streamlined, cost effective and well documented will also improve value.

If you are planning on selling your business in the coming years it is important that you review the above areas and implement any possible changes now, and not at the time you sell your business.