Elements to Increase Your Company Value – Financially
TAX VS. PROFIT/VALUE OBJECTIVES
There can often be a conflict between tax objectives and profit objectives. No one likes to pay taxes so the IRS has allowed certain tax-saving principles to be used to lower taxes. Many of these principles reduce net income. Lower net incomes produce lower business values. Therefore, it is important to determine when or if a business is going to be sold to maximize the profit objectives over tax objectives.
One example to illustrate the point: A group of owners, own a building. The building is leased to the same owners of a different operating company. The building tax structure will allow $40,000 per month rent to provide zero taxes for the building owners. The operating company is charged $40,000 rent. The market rent would be, say, $20,000 per month. The tax benefits are that the building owners have zero tax and the operating company can write off an extra $20,000 per month rent which lowers its taxes. Both parties win on taxes. However, for a valuation, an adjustment to market rent could be made to increase net cash and raise the overall operating business value.
Reoccurring revenue can increase the confidence level of projections and thus raise the value of a business because projections with a large reoccurring revenue base are more stable and increase the probability and surety that the revenue will occur.
Have you recently checked out the cost of an ALL-IN-ONE Hewlett Packard printer? (About $200) This printer has many functions: black and white or color copies, shrink or magnify, fax, photo printing, computer interfaces, scan and more. It is a great deal.
- How much was a laser black and white printer about 15 years ago? (About $10,000). Today’s printers are a great deal.
- However, how much is an ink cartridge? (About $30-$50) The reoccurring revenue is large.
- Another example: how much did you pay for your last cell phone upgrade? ($0 to a few dollars) Why? Because the phone company ties you into a two-year contract and the contracts are like an annuity and provide high-value multiplies.
Like an annuity and provide high-value multiplies
One CEO, explained that she did not have any reoccurring revenue because her customers had to renew every year. Her business was in the gym/spa business. Normally the turnover in this industry is 30%-50% per year. Many people join in January as part of a New Year’s Goal, only to quit after a few months.
In her business, 95% of her customers renewed each year. Wow, this is a high-value business that would command a large value multiplier.
Therefore, work to obtain renewing contracts, consumable products and create a proactive customer service program (Explained later) to raise the retention and renewal levels which will increase the value of the business significantly.
Topics on Financial tools to increase value to follow include:
Growth History and Market Potential: Rifle vs. Shot Gun Approach
- Net Profit: History and Potential: Management Accounting vs. Financial Accounting
- $1 Expense Reduction = $1 Net Profit Gain
- $1 Sales Gain @ 25% Cont. Margin = $0.25 N Profit Gain
- Contribution Margin: Break – even
Financial Qualitative Performance
- A/R Days – A/P Days
- Cash Flow
- Valuation Metrics
- Performance Dashboard