Factors To Increase The Value Of Your Business

Relevant For:

Business owners considering selling their business.

Key Points:

• Profitability and independent operation are crucial for business valuation.
• Maintain accurate financial records and minimise personal expenses.
• Understand and optimise the capitalisation rate.
• Enhance goodwill through strong branding and consistent cash flow.
• Properly structure the business to minimise CGT.
• Be aware of market cycles and time the sale advantageously.

Full Article:

Determining the market value of a small business is crucial, especially when the time comes to sell.

Understanding the factors that influence this value can help business owners manage and grow their business to maximise its worth.

Profitability and Business Structure

The key determinant of a business’s value is its profitability, supported by a reliable cash flow. However, it’s essential that this profitability isn’t solely dependent on the owner’s personal involvement. A business that operates independently of the owner will command a higher value.

Reliable Financial Accounts

Accurate and current financial records are critical. Prospective buyers need assurance of the business’s profitability, which is reflected in well-maintained accounts. Avoid excessive personal or discretionary expenses in the business records to ensure the financial statements accurately represent the business’s performance.

Capitalisation Rate

The capitalisation rate, a multiple of the net annual profit, is applied to estimate the business’s value. This rate varies by industry and is influenced by factors such as the certainty of future profitability. Secure long-term leases and exclusive distributorships can enhance the capitalisation rate.

Goodwill

Goodwill represents the intangible value of the business beyond its tangible assets. Enhancing goodwill involves establishing a strong brand, trademarks, and effective business systems. Consistent positive cash flow also adds to the goodwill value.

Cash Flow Management

Ensuring a regular, positive cash flow is essential for increasing business value. Effective business systems and practices can help maintain and improve cash flow.

Capital Gains Tax (CGT)

The business structure significantly impacts the CGT payable upon sale. Proper structuring from the outset and considering CGT implications in any structural changes can minimise tax liabilities.

Market Cycles

Understanding and timing the market cycle can affect the selling price of the business. Being aware of industry trends and demand can help owners sell at the most advantageous time.

Conclusion

Managing your business with a focus on these factors can enhance its value, ensuring you achieve the best possible return when it’s time to sell.