How to figure out if your company is worth something? It doesn’t matter how big the size is in terms of the business or how much growth it already has but the way how it grows and how you can make your business more valuable over time.
A business is a business. It’s a living and breathing entity with money, people, problems, good, bad, and the ugly, big or small doesn’t matter, the big or small business, it’s, all the same, they have different intended use, different problems but nevertheless they all are still belonging to the same category.
What they should look into in their business? What are some of the key pillars that appraisers look for as the kind of blueprint for assessing the value of something?
Since the last recession 2008-2009, the word “valuation” has gotten a lot of attraction. Pre 2008-2009 people were not aware of valuation word, but now people, our society, community, and business have become very aware of valuations. Also, how and why valuation becomes important. Anytime you just google anything a start-up or name a start-up e.g.: Airbnb or tesla within the first five hits you will see the word valuation like tesla worth so and so, Airbnb worth or last valuation, so it’s the mainstream popular media has made this term. Now everyone not only knows the term valuation but also talks about it like “oh did you know their valuation is so much” “do you even know what valuation means”
There are three basic ways to value anything are:
1. Income Approach: This method tells about what kind of cash flow this asset will give you if you own this asset and that asset could be a business, or the Brooklyn Bridge, or a patent, or a painting. You figure out the cash flow for the next 5 or 10 or 15 years and you present value it. It is the ideal way of valuing anything and this method is used by Warren Buffett. This gives the present value of the asset.
2. Market Approach: This is the method that gets been people into trouble and causes bubbles not that it’s wrong but it’s a method and this method does cause issues. E.g. you’re in the U.K and look at a house a 1500 square foot and then you will see what are other similar houses that are 1500 square feet, two stories, similar construction, similar neighborhood are going for and if they are going for a million pounds well your house is worth approximately a million pounds give or take depending some of the nuances. If you have a patio or something, add a few thousand bucks for a patio.
3. Cost Approach: What might be a cost to rebuild or recreate. If you own a factory and start this factory setup. This factory set up cost might be: need to buy the land, prepare the site, get permits permission design, acquire materials, organize labor and equipment and then execute. So, what would all that cost you? It might take a year, or two years, or five years. What’s the cost of that opportunity cost bake that in and what might it cost you if you get a big shot developer to do it vs. a mom and pop store to accomplish it.
So the three approaches are what kind of cash flow this business will give you and the present value of that cash flow today. What are other similar businesses or similar assets selling for? What might it cost you to rebuild or recreate that asset from scratch? So if there’s a Rembrandt and you can’t do a cost approach on it because of Rembrandt’s death. We can’t do anything about that you could have a forged Rembrandt but then it’s a forged Rembrandt.
Businesses need two things and these two things are important if you implement these two things then over the next six months you can double the business’s value, whichever business doesn’t matter.
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Any business needs two things since that is what a buyer is looking for. A buyer of a business wants to buy the business and then sit back and not work at all after buying that business. Now, how close can you get to that fantasy that’s the trick? You might not get all the way there but how close can you get, so they want to sit back and enjoy the cash flow (the money that brings in).
How do you make sure that the money keeps coming in?
1. One of the ways is to set up a recurring revenue business model. The recurring revenue business model is nowadays if you sign up for anything like you sign up for adobe, sign up for zoom, and sign up for LinkedIn. They want your money every month, or a yearly basis, or a quarterly basis. It’s not like you pay as you use or some different. Everybody wants a monthly check and has sort of becoming this landlord. So bring your business closer to that monthly paycheck.
For Example: If you own a beauty salon, how do you do that well come up with an idea that you know women can come and get their nails done weekly and give them some kind of a deal. Now if you’re charging them such as 20 pounds for each time they come to you and get their nails done. You might need to give them a break on the pricing like 15 pounds to get a commitment of coming in twice a month but taking that hit is okay because, if they come twice a month and they’re giving you 40 pounds a month and then you set up the business bottle in a way then, now they’re giving you 30 pounds a month but they’re committed every month. Your valuation is going to triple despite you losing money on the front end of the revenue because now the client is committed and the new owner knows that this business has got these 50 customers that pay 30 pounds a month. On the other side, women coming in and getting their nails done twice a month without any commitment, the new buyer is going to go or not, if those women are coming back or not.
2. Set up systems and processes so that you don’t have to go out and invite those women again and again.
For Example: If Alina has signed up in XYZ nail salon. Alina instead of charging you 40 pounds XYZ charge you 30 pounds but XYZ need to set up a system where they keep reminding Alina that “hey Alina your nails are due here’s a link set up an appointment, by the way, we charged your credit card five days ago, so set up an appointment we want you to come back, oh! Last time you picked this shade, this time would you like to pick this shade” make it easy for your customer and this is why the new owner wants to sit back and doesn’t want to be sending those emails he doesn’t mean you want to be calling. So, make it easy for them.
If you just do these two things not too many things you might be able to double the value of your business over the next six months.
Also, check the episode on “how to double valuation?” and read more about it on the What’s it Worth Youtube channel.