We recently completed a business valuation and value gap analysis for a business owner operating a chain of retail outlets. The owner wanted to sell the business in 2 years and retire. Unsure of what her business was really worth and, more importantly, what it needed to be worth at the time of sale for her to achieve her desired retirement lifestyle, the owner approached us with a “guesstimate” of the value of her business of $1.25M. However, our bank accredited valuation determined a result of $750k, a shortfall of $500k – 40% less than her expectations. The Value Gap Analysis also identified that the business value needed to be at least $1.05M at the time of sale for the owner to achieve her desired retirement lifestyle. Based on current profit growth rates, it would have taken 7 years to achieve this sale price.
This case study highlights how many business owners can have unrealistic sale price expectations for their business. It also provides guidance on how owners and Altitude advisers can work together to develop strategies for value and profit improvement by completing a series of sensitivity analysis calculations.
Client Issues:
• Accurate business value
• Growth in value is needed to ensure desired retirement lifestyle
• Uncertainty over how to grow value
Resolution:
Step 1. Business Valuation
We completed a business valuation consultation using Bstar’s Business Capitalisation Rate Calculator. The result:
| Owner’s sale price expectation | $1,250,000 |
| Our Valuation | $750,000 |
Step 2. Determine the Value Gap
Once the business value was calculated, we completed a Value Gap Analysis to determine the business value needed at time of sale to ensure the owners’ future retirement lifestyle.
| Current business value | $750,000 (3 x Profit of $250,000) |
| Future business value needed | $1,050,000 (3.5x Profit of $300,000) |
| Future profit target | $300,000 |
| Growth in profit required | $50,000 |
Step 3. Sensitivity Analysis
As part of completing the valuation and profit sensitivity analysis, we identified a number of areas in which the owner could potentially improve the quality of the business, along with the profitability.
One area was increasing sales. We identified that the owner would need to increase annual sales by around $500k, whilst maintaining her current net profit margin of 10%, to generate the extra profit and thus achieve the value needed at the time of sale.
The plan for increasing sales included a requirement that each of her four outlets grow their weekly sales by $2,500. To achieve this, we implemented a sales incentive plan with her retail staff focusing on growing high value profit lines and rewarding staff for above budget sales.
Step 4: Ongoing Support and Accountability
Our Board of Advice advisory service provides an opportunity for the business owner to spend time working ‘on’, not ‘in’ their business. By spending time ‘on’ her business with our support, we anticipate the owner will be able to minimise key business risks and maximise opportunities to grow and improve the business operations, thereby allowing the owner to have the future retirement lifestyle she desires.
If you would like to know what your business is worth and whether or not you have a ‘Value Gap’, please contact your Altitude Advisor.
