Value Driver Series #4 – The Valuation Teeter Totter

The fourth value driver we are going to address in our Value Driver Series is the Valuation Teeter Totter.

Remember playing on the teeter totter when you are a little kid?

If you didn’t want to go crashing to the ground or flying into the air, you needed to make sure that you and the kid on the other side of the teeter totter weighed approximately the same thing.  If one of you was significantly heavier or lighter than the other, the teeter totter was off balance.

The same concept applies to the relationship between the value of your business and the business’s ongoing cash flow needs.  As the business’s ongoing capital needs rise, the value of the business decreases.  When a potential buyer is evaluating a business, he knows that he is going to have to write you, the owner, a check for the purchase price.  He also knows though, that he is going to need money to keep the business operating.  The minute he signs the closing documents and takes over, he is going to need cash to make payroll, pay the rent, and pay suppliers. The more cash the purchaser knows he is going to need to be putting out to cover operating expenses, the less cash the purchaser is going to want to pay you, the owner and seller.

To avoid being on the low end of the valuation teeter totter, an owner should take steps to improve the business’s ability to generate cash.  Two common steps include adjusting the business’s accounts receivables and accounts payables to shorten the time in which customers pay money owed to the business and to lengthen the time that the business has to pay its bills.

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This blog article is for informational purposes only.  It does not create an attorney-client relationship and is not intended to be regarded as legal advice.