As a new year begins it’s a perfect opportunity to consider your purpose and strategic goals for the years ahead. Are you thinking about selling your business to a corporate? Looking at your Retirement plan or understanding what needs to go into your planning? Are you reviewing your succession plan and having a member of your team buy into the business? Has an employee share plan been on your to-do list for many years. All of these decisions and negotiations rely on a number which is the value of your business. Do you know what the value of your business is and what factors or drivers in your industry drive this?

When considering the value of your business, the contributing factors are often Earnings Before Interest and Tax (EBIT) and Business Capitalisation Rate (BPR) often referred to as a multiple. Improving either or both factors in the lead up to a transaction such as a sale, will increase the value of your business. Generally speaking, it takes 3 to 5 years to get your business into a position that will give you the best business valuation possible and ensure you are moving towards being ‘sale-ready’.

Value = EBIT X BCR *

*Please note this is one approach to valuing a business and may not be appropriate in all situations or for all sectors of your business. For specific advice on business value, contact us as it can get a bit tricky!

Earnings Before Interest and Tax (EBIT)

Earnings Before Interest and Tax (EBIT) is how profitable a business is from its day-to-day operations, before factoring in how it’s funded or taxed. In other words, EBIT shows the profit generated by the core business activities before interest costs and income tax. Improving EBIT generally comes down to lifting operating profit, either by or increasing revenue without a matching increase in operating costs, or by reducing operating costs while maintaining revenue.

Business Capitalisation Rate (multiple)

Often when you hear people discuss a business sale or a business value, they talk about the multiple they used. Technically speaking, the Business Capitalisation Rate (cap rate/multiple) is the rate of return used to convert the maintainable earnings (EBIT) into a value. What this means is, how many years the buyer is willing to wait to repay the purchase price with the profits. In the Australian SME Market, multiples range from 1 to 8 with the average being between 3 and 6. However, a business multiple is largely dependent on the industry and the risk and value drivers of the business. Do you know what the risk and value drivers are of your business? We can help you without doing a full valuation if you just want to know which levers to pull to make some changes to your business.

Once you identify your business’s key risk and value drivers, and your strengths and weaknesses against them, you can take steps to lift your multiple and increase the business value. At Power Tynan, we have a Risk and Value Driver Assessment (RAVDA) which is a detailed online questionnaire that allows you to gain a better understanding and assess the risk and value drivers in your business. It can also help identify opportunities and strategies for you to grow that value.

If you would like to maximise your business value and start building a stronger, more sale-ready business, contact us to complete a RAVDA and work together on improving your EBIT and/or multiple as who ever said I wish my business was worth less!

Contact our team today!