The Golden Gate Bridge. Uber. The Atlanta Airport. Airbnb.
What do all of these assets have in common? Bharat Kanodia, of course!
Bharat is the Founder and Chief Appraiser at Veristrat Inc. Over the course of his career, he has valued just about everything from businesses, real estate, industrial assets, governmental infrastructure, to financial assets. He has personally signed off on over 4,500 valuations with $2.6 trillion in assets globally.
So who better to sit down with to review the business valuation questions I hear day in and day out from my coaching clients? Bharat was kind enough to do just that.
How much is my business worth?
How do I increase the value of my business?
How do you even do a valuation in the first place?
Check out the full interview below for some much-needed clarity.
WHAT IS A VALUATION?
According to Bharat, the answer here is simple. A valuation is an opinion.
He goes on to detail the 4 pillars/intended purposes of valuations:
Transactions – When an asset is being bought or sold.
Tax valuation – For estate planning purposes, etc.
Litigation – When there is a dispute of some kind related to an asset.
Accounting, financial reporting, or audit
HOW DO YOU EVEN DO A VALUATION IN THE FIRST PLACE?
Bharat says that to do a valuation you must “get in the buyer’s shoes” and ask, “How much would I pay for this business?”
Other key questions would be:
“What kind of cash flow does this business give me?”
“How much are similar businesses going for in the market today?”
“What would it cost to recreate this business from the ground up?”
HOW DO I INCREASE THE VALUE OF MY BUSINESS?
In his words, buyers pay “big money” for businesses that meet the following criteria:
Businesses with predictable and reliable cash flow.
Businesses where the buyer doesn’t have to do anything to enjoy that predictable and reliable cash flow.
The closer you can bring your business to those two points, the higher your valuation will be.
So there you have it, make your cash flow as predictable and reliable as possible, all while moving your business more and more towards autopilot:
Push customers for long-term contracts. (Even if it’s at a discount, investors value that cash flow more and it’s worth more from a valuation standpoint.)
Subscription models can bring more stability when compared to one-time transactions.
Give customers the best possible experience and become essential to them.
Automate as much as possible.
Great management and a loyal customer base are also very valuable.
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94% of businesses registered in America have a revenue of $5 million or less.
The average $5 million business is running about $500,000 of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
The average $5 million business with $500,000 of EBITDA sells for 3-5x EBITDA.
Bharat gives us an example to drive the point home:
Say one of these businesses is valued and sold at 4x EBITDA:
4 x $500,000 = $2 million
Say they get lucky and someone is willing to pay them the full value in cash:
$2 million – taxes and cost of transaction (approx. 45%) = $1.1 million remaining
He says the average entrepreneur running these $5 million dollar businesses has $200,000 in debt. They would want to pay off the debt after making the sale.
$1.1 million – $200,000 = $900,000
60% of these businesses are owned by Baby Boomers (55-75 yrs old) with an average age of 64 yrs old. Average life expectancy is 79. So we can calculate the approximate time this business owner has left:
79 – 64 = 15 years
We then divide the remaining sum from the sale over those fifteen years:
$900,000/15 years = $60,000 per year
He then asks the following humbling question: “Is that $60,000 enough?”
For most of us, the answer is no.
These statistics definitely put things into perspective. If you didn’t before, hopefully you now realize the importance of recognizing your valuation and pursuing opportunities to increase it wherever possible.
If you’d like to learn more or set up an appointment to discuss a potential or upcoming valuation, you can contact Bharat at email@example.com.
If you’d like to explore other ways to grow your business and its valuation, remember that we're always here to help. Simply book your free Strategy Session with me and we’ll work together to uncover what might be holding you back.
ABOUT THE AUTHOR
Leo Manzione, co-founder of Montage, loves seeing a business owner equipped for success. When he's not in a strategic session or working with his team to build the tools business owners need most, he can be found swimming laps while listening to an audiobook or on a hike with his wife. He calls the Pacific Northwest home.