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Benefit #4 – Understand the Value and Profit Gap

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10 Benefits of Having an Exit Plan

 

Benefit #4 – Understand the Value and Profit Gap

Following on from the previous post Know Exactly What Your Business is Worth I am going to assume that you now have a clearer idea of the current market value of your business. If this is the case not then feel free to get in touch about how we can help you with this.

 

How did your business valuation come out?

Is your business worth what you expected or need to sell it for?

 

If the answer to the second question is “Yes” then congratulations you are in the minority!

If the answer is “no” then don’t worry, I work on a lot of business valuations and market appraisals for businesses of varying types and sizes, in most cases the expectations and needs of the owner does not match the market so you are not alone.

The important thing to remember at this stage is that there are a lot of things that you can do to influence and improve the value of your business.

 

What is the Value Gap?

Simply put, the value gap is the difference between the market value of the business and what you need or would like to sell the business for.

 

By fully understanding exactly what you need to sell your business for compared with the actual market value you can calculate the Value Gap and start working on closing it.

Once you know what the value gap for your business is then the process and steps needed to minimise the gap can be mapped out.

This does not have to be a long or complicated process and is quite likely more simple than you think.

 

What is the Profit Gap?

The Profit Gap is the difference between what your business is making and what it could or should be making.

As part of the valuation process we will typically go through all areas of the business, the financials (in particular the adjusted net profit) play a big part in determining the value of your business so it stands to reason that this should be a major focus for you.

Take two similar businesses with gross sales of $20,000 per week and for now lets focus only on the net profit that the businesses generate. Let’s also assume that the industry average net margin is 15%

If business (a) is running at a net margin of 10% then the annual profit generated would be approx. $94,545.45

If business (b) is running at the industry average 15% net margin then the annual net profit on the same turnover would be approx. $141,818.18

The difference between the two figures gives you a profit gap of $47,272 or an extra $909 per week that business (a) could and should be making every week.

If you were the owner selling business (a) then based on a 5 month sale process you could earn yourself close to an extra $20K in profit by getting your net margin at industry best practice levels as part of your sale preparation.

This is before we look at the difference that the additional profit would make to the sale price of the business.

 

Maximising Value

Hopefully the numbers above have shown you the benefit of checking the true value of your business and, if necessary making some improvements before going to market.

As well as the additional profit that you could make as you go through the sales process thorough preparation is also going to help you to maximise the value of your business.

In most cases the net profit of your business is going to multiplied to determine the eventual selling price. This multiple will be industry specific and where your business sits in the industry range will be dependant on a number of factors.

One of the ways that you can command a higher multiple is to have your business running at industry best practice net profit margins. In the scenario above business (a) would not be able to command a premium multiple as the net margins are lower than that of the industry standards or best practice.

Business (b) would not only be worth more because the profit was higher but it would also be able to push for a higher multiple as it is running at industry best practice net margins.

Businesses that run with higher net margins (in their industry) are by default more valuable and desirable businesses. The processes that the owners of these businesses have typically gone through to increase the net margins usually means that they are streamlined and well organised.

Regardless of what stage you are currently at I would encourage you to regularly check in on the key metrics and the current value of your business. Having a good understanding of these numbers is going to allow you to have a good idea if things need adjusting to make sure that you can sell on your terms when the time is right.

 

In Summary

Having a good understanding of the Value Gap before you go to market will allow you enough time to maximise the value of your business and meet the market at its current level.

By understanding the Profit Gap you will have the opportunity to refine your processes and financial performance to increase the value of your business and make more profit on the way out.

 

“Exit Planning is just good Business Strategy” – In an ideal world you would have an Exit Plan in place before you bought or started your business. If this is not the case then the next best time to create one is now!

Having a business that is ready to sell at anytime makes sense on both a personal and professional level. By focusing on growing the value of your business you will naturally highlight areas that need improvement and by refining these before going to market you will sell for more money and in less time.

I hope that this encourages you to look at the current value of your business even if you are not planning on selling anytime soon.

If you would like to have a chat about your business, your exit strategy and the potential current market value then feel free to book in a time here https://calendly.com/paul-gse/appraisal_call

If you would like a full market appraisal on your business then I would be happy to discuss how this works on our call.

Alternatively feel free to DM me or email me at [email protected]

 

Good luck
Paul

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