8 Key Drivers Of Company Value (Series) – 4. Valuation Teeter-Totter
This series of articles follows on from an article I published recently, titled “8 Key Drivers Of Company Value That Every Business Owner Should Know”, where I mentioned that I use the Value Builder System™️ to help small business owners grow the overall value of their companies, by focusing on 8 Key Drivers that impact company value.
At the heart of this system is the Value Builder Score, which determines how well a business is performing in each of those 8 key areas. This series of articles provides some deeper insight into each driver with tips on how to improve in those areas.
But ultimately, what makes this important? It’s every business owners dream to be rewarded for all the hard work they put in over the years when they finally decide to exit, so they get to enjoy a long and happy retirement without financial worries.
So, knowing about these drivers and how to improve them, puts business owners on a path to maximizing the value of their companies while giving them the peace of mind to know that they are growing an asset of value before they exit.
Today we’ll look at Valuation Teeter-Totter, which looks at cash flow and whether the business is a cash suck or a cash spigot.
This is how John Warrillow, the founder of the Value Builder System, explains it:
“Remember when you were a kid, you’d go to the playground, and you’d be on a teeter-totter? There’s a light kid, and a heavier kid gets on, and the light kid goes up. The same relationship exists between the way cash moves through your company and its value, and it’s one of the drivers of sellability.
Essentially, when a buyer comes and buys your business, they’ve actually got to write two checks. They write a check to you, the owner. That’s obvious. They have to write a second check that a lot of people don’t really think about, and the second check is to fund your company’s working capital. That’s the money your business needs to operate the day you hand over the keys to the buyer.
The deal is that the buyer has to write those two checks out of the same check-book, so the more your company sucks up in the way of cash, the more cash your company needs to operate, the less they’re going to be willing to buy your business.
The way to improve your score on the valuation teeter-totter is really to make sure that your business is generating cash. If you collect receivables, collect them faster. If you can extend your payables a little bit more, make sure you’re delaying your payments to the point where you’re just generating more cash as a business, and that’s going to improve your score on the teeter-totter.”
John also delves a little deeper into this topic on his “Built to Sell Radio” podcast:
“In this episode, Arik Levy was facing a problem: A retailer with a nation-wide footprint was ready to buy his locker services, but they didn’t want to pay his standard 50% deposit. Without that money, he had no way to finance the manufacturing of the lockers needed for the contract.”
Listen in as Levy explains how he found a creative solution to this cash flow problem.
So if you’re a business owner who’s planning ahead and considering ways to exit your business on your terms, I hope the information I provide in these articles will help you reach those goals.
If you would like to chat to me about this in person, feel free to book a slot in my calendar and we can discuss it further.
FREE Assessment:
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