Increase the Value of Your Business By Demonstrating Growth

This June, I attended the annual conference of the National Association of Certified Valuation Analysts at The Wynn in Las Vegas. See www.nacva.com for their web site. I attended a variety of classes on various business valuation subjects. One of the most interesting was a presentation by an investment banker. While many of the classes at the conference were theoretical, the investment banker talked about the subject from a practical standpoint.

He basically said he would almost always buy solid businesses at five times earnings (which equates to a discount rate and a capitalization rate of 20%). However, if he were to go beyond five times earnings, the seller would have to prove to him that the business had an opportunity to grow. If the business had growth potential, the multiple paid could be increased. The chart below illustrates this. For example, an expected long-term sustainable growth rate of 5.7% means that a cap rate of 14.3% results when using a discount rate of 20%. The 14.3% cap rate equates to a multiple of 7.

I hope I've explained this in a way that makes sense. If not, please e-mail me. The bottom line is this. If you are looking to sell your business, and you want a value more than a multiple of five, you better be able to demonstrate to a buyer that the business has long-term, sustainable growth potential.

	Capitalization Rate
		Less
Discount		Growth	Cap
Rate		Rate	Rate			Multiple
20.0%		0.0%	20.0%			5
20.0%		3.3%	16.7%			6
20.0%		5.7%	14.3%			7
20.0%		7.5%	12.5%			8
20.0%		8.9%	11.1%			9
20.0%		10.0%	10.0%			10