If you could generalise businesses across the board, the valuation principles worked off, what is your adjusted profit times by your business valuation multiple? The answer is an indication of the risk in your business. So, you get a higher business multiple if you’re a lower-risk industry or business, or you’ve got systems in place, or the business owner works five hours a week. You’ll get a very low multiple there if you’re working 80-hour weeks, or you’re reliant on a very small amount of customers (and if one leaves, you’re up the wrong creek to be up) – things like that that are at high risk, will mean low multiple. The more we can work on our business multiple and increasing our adjusted profit, means that the higher our business valuation will be.
If you use Xero as your accounting software and you open the profit-and-loss statement, that’s a guide to working out what your profit is, but we really need to make sure that we’re looking at what a potential buyer might be looking at. So we’ve got to adjust for things like, what would that business purchaser need to pay you (or another person) to run that business? Usually, they add back interest if you’re funding your business and it pays interest, because the buyer would need to take that into their own considerations. Things like depreciation usually come out of that. Any benefits that to you, as a business owner, that the incoming buyer might not need to keep on, like your car or optional international travel. Even business coaching; a buyer of your business will probably not continue some of those things, so that can come out of your expenses, and so it’s a bit of a different adjusted profit.
So, there’s a bit of method in the madness to work that out, but once you know how to calculate it, do you know what your adjusted profit is? Or do you know what your business multiple might be – or at least your industry average or benchmark? The other thing to consider with that is, do you know how to increase that? So, increasing your adjusted profit or increasing your business value. If you de-risk your business (or do things to reduce the risk), then you will end up increasing your business value.
If you’ve got higher profit and less hours, this means less key-person reliance. Ideally, more happiness as a result of those two things. They will mean increasing your business value.
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