How Much Is Your Business Worth?

Greig WhittonFounder, Evergrow

Grant JacksonValuation & strategy specialist

Webinar outline

• What drives (and erodes) the value of a business?

• How much is your business worth?

• Implications of your business value

• Next steps

“How to Achieve Financial Freedom”

• Business value indicates potential wealth upon exit

• To estimate required personal wealth:

− Adjust annual earnings by inflation and lifestyle changes

− Multiply annual earnings by years of financial freedom

“How to Achieve Financial Freedom”

• Business value indicates potential wealth upon exit

• To estimate required personal wealth:

− Adjust annual earnings by inflation and lifestyle changes

− Multiply annual earnings by years of financial freedom

• To estimate required business value:

− Deduct the maturity value of long-term investments from required personal wealth

− Adjust by the proportion of business ownership

Which business would you buy?

Company A Company B Company C

Consistently profitable Consistently profitable X Volatile profitability

Excellent staff and systems X Dependent on the owner X Dependent on the owner

Strong brand X Weak brand X Weak brand

What determines business value?

• Earnings and certainty determine investment value

• Thus, the value of a business is determined by its:

− Ownership earnings (i.e. annual net profit after tax)

− Overall risk profile

• Earnings and risk can be cascaded into granular factors

• The owner is often the biggest risk

How much is your business worth?

• For an accurate valuation, consult a specialist

• The quick estimation: multiply annual net profit after tax by a

risk profile number (usually between 1 and 10)

− Low numbers reflect companies that are very owner-dependent, have limited

competitive advantage, and are in other ways risky

− High numbers reflect companies that can operate without the owner’s involvement,

have a strong brand, and are in other ways well established

Implications of your business value

• Required value – current value = your value “gap”

• Bridge your gap by growing profit and/or managing risk:

− Large gaps usually indicate that growth needs to be prioritised

− Small gaps can often be bridged by managing risk better

Business value case study

• John needs R20 million in 10 years

• His required business value is R10 million

• His current business value is R2 million:

− Annual profit after tax: R500,000

− Risk multiplier: 4

• What should John do to bridge his value gap?

Business value case study

Scenario A Scenario B Scenario C

Focus entirely on growth Prioritise risk Balance growth and risk

Grow ANPAT to R2.5 million Increase risk multiplier to 10 Grow ANPAT to R1.5 million

Maintain current risk profile Double ANPAT to R1 million Increase risk multiplier to 7

Next steps

1. Calculate your business value gap

2. Prepare a value management strategy

3. Cascade your strategy into granular business priorities

Need more help?

• Evergrow forums

• Webinars

• Greig: 021 671 8225

• Grant: 082 801 4927