Why Is It Important To Know The Worth Of My Business?

April 4, 2023|Insurance & Finance

By Victor S. Parra, Contributor

When you read this headline, you may be asking yourself, “Why do I care? I’m not interested in selling my business.”

Uncertainty seems to control a lot of decision-making these days. With Wall Street analysts continually touting their concerns for an economic downturn in 2023, business planners are hesitant to consider future investments. Thus, important business decisions are being put on hold while the economic horizon remains cloudy.

So, what can you do to move forward?

Peter Drucker, noted management guru, once wrote, “You can’t predict the future, but you can make decisions today that will have an impact on the future.”

Perhaps, you can begin by knowing what your business is worth. This can provide critical insights into how well your business is performing, and, more importantly, what you can do to increase the value of your business going forward. Ultimately, it can be the benchmark to evaluate key business decisions.

For example, if you add new staff positions, say a marketing person and an additional mechanic, how will that affect your bottom line? Will the additional revenue from the sales position and potential cost savings from having better maintained equipment offset higher overhead? And how will these decisions affect your cash flow – the rate of money coming to the business versus rate of money going out — and thus directly impact the value of your business?

Similarly, what happens to the value of your business when you take on a new contract that consumes much of your fleet? What is the opportunity cost between fulfilling the contract versus the revenue typically generated from existing/expected business during the period of that contract? And ultimately, how does this impact the short- and long-term value of your business?

Similarly, if you trade in a 12-year-old, paid-for bus, for a newer piece of equipment, how does that impact your business valuation over the short and long term? If the immediate affect is a reduction in value, how much additional revenue, over what period of time, must generate in order to build back, and hopefully even increase, the value of your business?

And, of course, a high valued company will receive a more attractive interest rate when purchasing equipment. Similarly, when comparing two equally safely managed companies, they may offer the company with the higher valuation a more attractive rating, and thus a lower premium.

So, the question you should be asking, “Am I increasing the value of my business?”

Enough about why you should know the value of your company, now how to come up with a value of your business.

A key component of business value is EBITDA (earnings before interest, taxes, depreciation, and amortization). Let’s take a look at each component. Here’s sample from a year-end financial statement:

EBITDA

Net Income $2,000,000

Interest Expense $280,000

Income Taxes $400,000

Depreciation $310,000

Amortization $23,000

Total $3,013,000

The next step is to make adjustments to EBITDA to account for any expenses/income that in essence do not add to the operating performance of the business. Here are some samples of what would apply:

Owners Auto Expenses

Family auto/lease $50,000

Fuel $4,000

Insurance $2,300

Total $56,300

Inactive Family on the payroll

Son $30,000

Daughter $30,000

Spouse $30,000

Total $90,000

Family cell phone/Internet $2,000

Charity $7,000

Personal meals $3,000

Country/Golf Club $15,000

Non-recurring

Remodeled office space $80,000

Total Adjustments to EBITDA – $253,300

By adding back in these adjustments, you boost your EBITDA to $3,266,300. This is important since it could elevate the value of your business. The higher the EBITDA, the higher the multiples.

The above example could garner multiples of 3.5 to 4 multiples, bringing the value of your company in the range of $11,432,050 to $13,065,200.

Lastly, if you are considering transitioning your business and wish to work with an investment bank to develop what is called an “opinion of value,” the worth of your business in the open market, here’s the information you need to pull together:

The last 3 years financial statements: 2020, 2021, 2022 and 1^st two months of 2023 and balance sheets;
The last 12 monthly statements (from software in use), not cumulative, but for just each month separately; and,
Coach equipment list — A list of all coaches, Mfg., model, age, seats. This detail can come from your list of insured assets from your current policy that you provide your insurance company.

At this point, you should know that most purchasers, particularly private equity firms, are not interested in buying your building, land, or any of your real estate. Instead, a PE firm will lease your property back from you, thus providing you with an additional revenue stream. In addition, you should know they will typically pay more for your company than another strategic buyer, i.e., another bus company, especially if your business has a good history of performance and future growth opportunities.

That’s all I’ll say about selling your business at this time. I’ll cover the different selling options you may have in a future column.

I hope this is helpful. Should you have any questions, please feel free to reach out to me at vparra@strategic-focus.com. In the meantime, I wish you great success!

Victor S. Parra is a retired President and CEO of the United Motorcoach Association (UMA) and currently an advisor with Strategic-Focus Advisors, LLC, a consulting firm that works with Corporate Finance Associates (CFA) — a 60+ year old investment bank, providing M&A guidance in the transportation space. Concentration is in the middle market.