Welcome Inc bloggers

Poll Directions – on the left side of the page are two polls important to next weeks Inc's blog. The first poll asks about your end game – when the time comes for you to leave the business, how will that happen? The second poll asks about your current stage of growth - what are the real priorities demanding immediate attention and what can be postponed to a later date? We intend to build next week’s article from your responses – so decide what we write!

Your End Game

Instead of discussing the pro’s and con’s of your end game options, lets start the discussion by working backwards – How are Businesses Valued? When an outsider looks at the business - how is value determined? By understanding how they will view the business, you can make a better decision about your growth strategy. There are three methods used by business brokers, merger & acquisition firms, and venture capitalists to determine value:

• Net Asset Value
• Market Multiple Value
• Income or Discounted Cash Flow Value

Net Asset Value looks at the market value of components of the business. It works well for acquisitions where the buyer wants individual pieces, not the whole operation. Some times the individual parts are worth more than the whole and this is a method to pull value out. It works well for companies that are comprised of mostly hard assets like real estate and natural resources.

Market Multiple Value looks at the expected earnings and cash flow over a period of time generated by the entire operation to establish a formula. The valuation establishes the worth of the business like 2 or 3 times sales. It works well for mergers where the buyer wants the operation to improve or enhance an existing business. In addition, it works well for companies comprised of soft assets like brand reputation and knowledge.

Income Value looks strictly at cash flow over a period of time. It's valuation is a function of how much this additional cash flow is worth to the acquiring business. It works well with companies that have large and predictable high velocity cash flows like pay day loans, pawnshops, bars and clubs.

Here is my rationale, if you know how the business will be valued, that should determine which growth strategies make the most sense. For example, if your end game is to grow and sell, then investing in either hard assets or functions that improve the amount and velocity of cash flow make sense. Making sizable investments in human resources or infrastructure will actually decrease your valuation! These investments make sense if your end game is to grow and hold such as taking the company public and the value will be captured as part of a Market Multiple approach.

We will investigate this further on next week’s 1:1 meeting @Inc. blog.