Three key ingredients add up to a simple way to help business owners quickly establish an objective valuation for their company.
When Julie Goldman, owner of the Original Runner Company, asked for an investment from the Sharks, several including Kevin O’Leary disagreed with her $1.8 million valuation of her company. Incidentally, Kevin liked her company, but offered to take a 51 percent stake because he thought she has no idea what she’s doing.
Julie, who came across very capable and business savvy (contrary to Kevin’s assessment) shot back with some pretty serious formulations to defend her $1.8 million valuation, which really impressed Barbara Corcoran.
Julie also put a value on the fact that hers were the only fabric runners available and that many churches and synagogues only allowed her specific style of runners for weddings and other celebrations.
Certainly that should have added to her business value, right?
So what’s really the best way to value your business?
Just three simple factors: net income, plus hard assets, plus predictable future cash flow, according to Neal Frankle of Wealth Pilgrim.
- Net income:
Really. That’s after all expenses, including a reasonable salary for yourself. And be honest if you’re factoring in personal expenses paid for out of your business.
- Hard assets:
Whether it’s a building, machinery, patent or territory, its business value should be included. This could also include market share, intellectual property, or anything with measurable value to someone who bought the company tomorrow.
- Potential cash:
Run the numbers and see if the free cash flow trend is up or down. If it’s rising, add the gains into the business value of the company. But be prepared to provide data.
What do you think? Does Julie understand business value? Feel free watch (or re-watch) the full episode on Hulu.