Today we’re kicking off Part 8 of Becoming Financially Well Organised, with an insight into the Business Plan – The Forgotten Gold Mine!
Most businesses are capable of being sold; it’s just a matter of how much they are worth. Even for those businesses that are rarely sold (such as specialist medical practices), the same principles apply.
It is a matter of developing strategies and solutions to maximise the value of your business.
After all, your business is the only asset you can control the value of.
Businesses are valued in many different ways. A potential purchaser is likely to pay more for your business if the risk to their return income is less. Purchasers aim to retain their capital and of course, increase its value.
This is referred to as an earnings multiple. The lower the risk to the purchaser, the higher the earnings multiple, therefore the higher the value. Conversely, the higher the risk, the lower the earnings multiple, therefore the lower the value.
When looking at your business value you need to consider the following two factors:
- Increase the earnings multiple by reducing business risk; and
- Increase the earnings
To explain earnings multiple using some figures:
need to explan impact of profit increases as well
If a business is earning $200,000 profit and the purchaser considers there is a higher risk that the income won’t be maintained for the long term, they might apply an earnings multiple of 2 to 3, which values the business at $400,000 to $600,000.
If the purchaser considered there is a lower risk to income, they might apply a multiple of 4 or 5, or even higher. The business will be worth $800,000 to $1,000,000 on the same profit amount.
Let’s multiply this further by increases in profits. If those profits were increased to $300,000, at an earnings multiple of 2 to 3, the range of business value would be $600,000 to $900,000. At an earnings multiple of 4 to 5, the business value would be $1,200,000 to $1,500,000.
Drive your profits higher
Reduce the business risk
Higher business value
Regardless of wanting to sell your business or keep it, you need to consider the above key factors. You can then develop strategies to lower your business risk and increase your earnings.
The first place to start is setting your business goals and objectives. You need to think about where your business is now, where you want it to be, and how you are going to get it there. It’s important to make sure your business goals align with your personal and financial goals.
Then you need clear action plans – implementation is the key.
Following the 5 Drivers to Business Success will ensure you focus on increasing profits and reducing business risk.
The 5 Drivers to Business Success are:
- Business Context
- Organisational Responsibility
- Financial Management Systems
- Revenue Strategy
We hope that this has been an interesting and productive introduction to the power of the business plan! Next week we will continue with part 8 of Becoming Financially Well Organised by discussing and reviewing clear actions plans for your business plan. Stay tuned.
Like to know more about what a properly executed business plan can do for you, Call elliotts today on 07 3833 3999 or visit our website at elliottsgroup.com.au.