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Risk Reduces the Value of Your Business

Do you know what drives value in your business?

There are three key factors that drive value in any business: cash flow, required rate of return and risk.  And whilst the most significant of these is cash flow, risk has a big impact on future value.

If you can show any buyer of your business that your cash flow will double over the next three years, you will almost double the value of your business.  So a business worth $100,000 can suddenly be worth $200,000 or more if you can show that cash flow will double in the future.  But will the buyer believe you?  That will depend on the perceived risk of the business – the risk the buyer perceives, not you.  

What is risk?
Many banks in the US are now discovering what the word "risk" means.  Put simply risk is the probability that a certain event will happen.  In business terms, risk often refers to the uncertainty of future cash flows.  And recently banks such as Washington Mutual, Bear Stearns and even the merchant banking stalwart Merrill Lynch has realised that their future was full of high levels of risk - they went broke.  Banks are no longer "as safe as houses", since the houses they loaned money against are worth a lot less than they thought.

How does risk impact your business?
So your task, should you choose to accept it, is to convince the buyer of your business that your cash flows will increase.  As the level of uncertainty about these cash flows increases, the potential value of your business decreases. 

You need to assess the future risk of your cash flows before you put your business up for sale.   Will you achieve revenue growth greater than inflation over the next three years?   Can you show consistent growth in net profits, or can you show how a new owner will generate consistent net profits in the future?   What external events will impact the cash flow of your business and how well prepared are you for these events? 

Being able to answer these questions convincingly will give the buyer a greater level of confidence about the future of your business.  An increased level of buyer confidence will translate into a higher premium for your business.

Are you ready?
So how prepared are you for your exit strategy?  Do your financial statements really tell a buyer that your business is worth more than the reported cash flows?  

If you're prepared, most businesses can demonstrate some level of opportunity for the future, but it is how well that case is put forward that will determine the price you get for your business.  After all, the price you get for a business will depend on how much someone is willing to pay, given the information you give them.  So just how good is that information?
What Next? 

If you want to find out what information you should present to a potential buyer and how it should be prepared, ask for a free assessment of your current situation.  We help empower business owners with knowledge so they can understand and realise the hidden value of their business.

Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.  

We offer a free assessment of your situation and review what potential value exists within your business.