It Doesn’t Take an Einstein to Understand This Formula for Growing Your Business’s Value - Al Zdenek

Unfortunately, most of us depend on the man. That means we require a business owner to sign our paychecks. Yet being the business owner comes with challenges of its own: the well-being of your employees, the success of your company, pivoting with changing economic conditions.

However, one great advantage that a business owner has is the ability to build wealth more quickly. If the business is producing enough cash flow , they can live the lifestyle they want now, pay their taxes, and put aside money in a pension plan and other investment accounts to build wealth and retire in the timeframe they want. The business itself is an additional asset that can add to their personal wealth when it’s sold.

Be sure you’re taking the necessary actions now to ensure your business has the highest value possible when you’re ready to sell.

Sounds like a pretty good deal, right? But as the owner, you’ll want to take necessary actions to ensure your business has the highest value possible when you’re ready to sell.  That means maximizing cash flow.

That’s where we come in. We’ve helped many business owners sell their companies and increase their personal wealth. If you’ve ever sold your house, you know you’ve got to maintain it and put in some money to increase its value. It’s the same with a business.

So, how can you add “curb appeal” to your business and dress it up to prepare for the sale?

It’s pretty simple: find ways to maximize your cash flow before you’re ready to sell. You just need someone with the know-how to make it happen.

Enter the Business Wealth Building Formula™

V x T x G% = $$$

  • V is value or what you want to sell the business for.
  • T is the timeframe in which to sell it. Five years? Ten years? This is when you’ll need to increase its value.
  • G% is growth rate. What’s the annual percentage of growth required to meet the value you need?
  • $$$ is cash flow or EBITDA, which stands for “earnings before interest, taxes, depreciation, and amortization.”

Let’s look at an example and say I’ve got a million dollars to invest. I have two options: invest it in the market or buy a business. If I choose the market option, I can assume I’d make about 5 percent a year, or $50,000. There’d be less risk, but a limited return so if that’s all the business is making, I’d probably pass on buying it. But let’s say the business is earning $200,000. How much would I pay for that cash stream? Well, for me to earn $200,000 in the market at 5 percent I would need $4 million. Is it worth it?

I would look at it like this: “Whatever I invest in, I want to earn 20% on my money because the money invested in a business means higher risk for me.” I might be willing to spend $1 million for a business that produces $200,000 a year for me because that’s a 20% return. So, in this case, I have valued the business at five times the bottom line (adjusted to become EBITDA).

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