You may assume business valuations only matter if you’re looking to sell the business, but it is also critical for your growth planning, succession, ownership transition and long-term strategy.
“We have tons of owners who come to us and say, ‘I’m ready to sell my company,’ and then it gets stalled for six months a year because they have to meet with the financial advisors and understand what the long-term tax implications are, what the transfer may look like to spouses or kids or family members,” says Aaron Kroll, partner at Sterling Point Advisors.
Kroll will share practical insights into the methodologies, challenges and common pitfalls involved in valuing a landscape business during his session, “Decoding Business Value: An In-depth Discussion on How to Value Your Business” on Wednesday, Nov. 11 at 8 a.m. at ELEVATE.
Kroll says attendees will walk away from his session with actionable items that will help increase their business valuation, tools to benchmark against the competition and an understanding of what their valuation means in the grand scheme of things.
“I know there’s a ton going on as a business owner,” Kroll says. “You have a million things, jobs, people, employees, conferences, everything else. So, I really want to give them some easy tips to take away, and then also just some actionable items that they can use.”
Why Business Valuations Matter
Kroll says it’s beneficial to understand your business valuation because it helps you understand your overall profitability.
“There are a lot of things that go into the business valuation that dissect the various aspects of your business and really show you the total profitability,” Kroll says.
He says the business valuation also helps owners set a growth plan that will help them break apart the individual components and reach their goals in a more efficient way.
Kroll will walk through 5 to 10 major line-item expenses and how they affect your long-term valuation and profitability. Some of the methods to improve your business’s valuation that Kroll will explore include how to spread out the seasonality of your business and how to time fleet purchases.
“Any change in that profitability drastically changes your valuation,” Kroll says. “Let’s say, for example, you’re going to stop doing snow, and snow is 30% of your revenue. You want to understand how that may affect your valuation in the future.”
Session attendees will leave with the tools to be able to review their valuation on a regular basis and look at the big picture of their business. Kroll will also explore how owners can calculate their working capital.
“A lot of owners, you put your head down and go to work, and then you look up, and you’re like, ‘Oh, I missed that month,’” Kroll says. “These are things I should really be thinking of, so it’ll give you a lot of areas to look at.”
For simple valuations, an owner, their accountant and a few other employees can help pull together the metrics needed.
“We try to tell a lot of people, ‘Hey, do this really simplified valuation first, and then if you need to get more detailed and need to bring other people in, you can,” Kroll says.
Kroll recommends conducting valuations on a yearly basis around the same time as your budgeting process.
“I think it’s a great time to do that because, one, it can help you with your budgeting process,” Kroll says. “We see a lot of people that do the budget and then have to make adjustments here or there. I think when you do it together, they both drive each other forward, and it also helps you benchmark yourself against not only your own company, but then others in the industry.”
Common Valuation Approaches
Kroll says there are two schools of thought when it comes to a business’s valuation. Seller’s discretionary earnings are typically what smaller businesses are sold on, and it’s what the owner takes home. Meanwhile, EBITDA has become the industry standard.
“During the session, I’ll talk about what goes into each of those, but really understanding what the difference between those two numbers is and how you really break down how that valuation differs between the two,” Kroll says.
Some of the other factors driving a company’s value is the nature of their services, the assets they have and key man risk.
During the session, Kroll will also break down how selling to different groups will impact the valuation as well.
“We have sold a lot of different businesses and a lot of different types of buyers, and we completely understand that the best path for you might be to sell to your management team, might be to sell to a group of people, might be to sell to a family member, could be to sell to one person taking over, but there is a significant difference in the way you value those two different types,” Kroll says.
Kroll says while private equity values EBITDA and can pay significantly higher multiples, other groups cannot pay the same amount due to debt and the stress it would put on the business.
“That’s not to say you can’t sell to an individual,” Kroll says. “We never say that, but it’s just understanding. Hey, if I’m going to go down this path, that’s what this looks like as to where if I go down the private equity path, that would look like that, and obviously there are pros and cons to both.”
Kroll will show P&Ls and balance sheets so owners can see real-world examples and benchmark themselves against other companies across the U.S.
Want a clearer understanding of how buyers, investors and advisors assess business worth? Register for ELEVATE, and we’ll see you in Tampa, Florida!
