business valuations but keeps good businesses
in business.
Investors seek out businesses that generate
60 percent or higher gross profit margins or
businesses that consistently deliver bigger gross
profit margins than industry competitors.
4. Brand strength. Valuable brands that
are loved by their customers receive top dollar
for their products or services. This is because
customers shop for what they want first and
look at price second. Businesses can earn extra
valuation bonus points if their brands can also
be applied to other product or service categories
in the future.
5. Intellectual property value. Businesses
that own trademarks, patents, trade secrets and/
or copyrights can rely on federal laws to protect
their innovations from competitor misuse. But
not all patents and trademarks are valuable.
More valuation credit is given to intellectual
property that generates revenues from licensing
or truly blocks competitors from participating
in fast-growing markets.
Now you know more about how business
buyers—the investors who can pay you thousands or millions of dollars—may size up your
company’s value. If you are thinking about a
new business initiative, ask yourself if it will
enhance any of the fundamentals of business
value listed above.
When you allocate your company’s
resources to initiatives that will build your company’s value, you are managing your company
with precision and purpose. You can do it. C
Costco member Susan Schreter is the author
of several business books, including her newest,
Start On Purpose: Everything You Need to
Know and Do to Startup with Strength,
(TakeCommand Information
Media, 2013; not available
at Costco.)
small business
fewer customers and lower profits tomorrow.
Here are five more fundamentals that
matter to astute business buyers and investors.
1. Revenue predictability. How stable is
your company’s revenue base? Businesses that
serve customers through multiyear contracts
or can prove high rates of repeat business are
valued more highly than companies that have
to fight for every customer year after year.
2. Reliable cash flow. A company’s customer list says a lot about its value. Ideally,
businesses want to have an impressive list of
customers who pay their bills on time.
Investors dislike investing in a business with
high rates of customer service problems,
product returns, consignment sales or discounted orders.
3. High gross profit margins. Businesses
with a high gross profit margin have greater
leeway to survive recessions and surprises.
Every percentage-point gain in gross profit
margin performance not only helps boost
By Susan Schreter
WHY IS IT that an unprofitable research-stage technology company with no revenues
can be worth millions more than a stable business with several years of revenues and profits?
The answer to this fiscal unfairness can
be found in how businesses are valued by professional business appraisers, investors and
business buyers.
“Business owners are often shocked when
they discuss their company’s business value
with prospective investors. They believe their
companies are worth a lot of money because
their companies are worth a lot to them,” says
Patrick Colabella, a licensed business appraiser
and professor at St. Johns University in New
York City. “When you put your heart into a
business, you expect everyone will value your
work in the same way, but they don’t,” he adds.
Colabella, a Costco member, encourages
business owners to learn more about how
businesses are valued long before they want to
raise capital or sell the business. Fortunately,
the basics of business valuation are easy.
Business investors often refer to the factors that influence business valuation as
“business fundamentals” or “investment fundamentals.” Some fundamentals can add to
the perceived financial value of a business,
while other fundamentals can lower the perceived value of a business.
For example, businesses that operate in
fast-growing markets will get a valuation
boost. In contrast, businesses that operate in
markets where there is shrinking customer
demand will receive a valuation “haircut.”
Why? Because smart business buyers know
that companies that operate in shrinking
markets eventually cut their prices to maintain market share. Nasty price wars scare
business investors. They don’t want to
pay top dollar today for a business
that is likely to have
Valuation evaluation
Practical ways to boost your company’s value
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