Apress Valuing and Selling Your Business, A Quick Guide to Cashing In (2014) by unknow

Author:unknow
Format: epub
Tags: Management Science, General, Management, Entrepreneurship, Finance
ISBN: 9781484208458
Google: rajeoQEACAAJ
Published: 0101-01-01T00:00:00+00:00

The buyer or the valuator not only needs to understand the amount of revenues that come from the large customer but also quantify the true risk factor. At times, I have not placed a high risk premium for customer concentration issues. This happens when the risk level is mitigated by a long-term contract or by the fact that the client’s product is unique and needed by the customer.

Low barriers to entry: Companies with low barriers to entry are more risky than those with a high barrier to entry. How easy is it for a competitor to enter your market? You may be making a ton of money, but if it is easy for a competitor to grab your market share, it is unlikely that the cash flow will be sustained. A good example of this is web page development companies. In the late 1990s and early 2000s, there were a few large companies that focused on developing web pages for businesses. They did quite well for a few years, but then most of the larger companies in this industry went bankrupt. Why? They created very large organizations with significant overhead, but the cash flow was not sustainable. The barriers to entry in the industry were very low. Soon, advertising companies and individuals were competing and the prices to develop web pages dropped significantly. I am not discounting the skill and importance of this service—I’m simply making a point. To get into this business, no license or college education is needed, and there is very little out-of-pocket costs. If you are skilled in this area, all you need to get into business is a computer, a business card, and the ability to market yourself. Compare this to a business that has a significant amount of intellectual property that is protected and requires millions of dollars of investment to get established. There are very few individuals or businesses that have the resources to compete with Apple or MGM casinos.

Product sustainability: Today, products and services become obsolete much faster because of technology advances. If you don’t believe this, simply look at the current market value of Research in Motion (the manufacturer of the Blackberry). It is currently worth a fraction of its value five years ago. Why? The iPhone and Android phone technology has displaced the Blackberry. In order to determine the risk level for product sustainability, it is important to perform an analysis of where the company’s products are in the life cycle. Are they mature products in a highly competitive market, or is it new technology that is legally protected and will not face major competition in the coming years? To lessen your risk and make your business more valuable, make sure that you protect your products and processes and any other intellectual property legally.

Inconsistent financial performance: Investors love cash flow that is repeatable when making an investment. If there are two companies that have averaged $500,000 a year for the past five years in earnings, which one of the following

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