Are You Evaluating Business Decisions Based Upon Added Value?
When faced with a business decision such as expanding a business or adding resources, most small business owners use traditional cost-benefit criteria based on expected new revenue less expected new costs. However, what if I told you that this approach could lead to poor decisions, and there is a better way to assess your choices? To explain my point concept, let’s look at two examples.
In our first example, we have an opportunity to add a new product or service that will generate $2.0 million in new revenue. Direct costs would be $1.6 million, and you estimate that the initiative will add another $100,000 in administrative costs. Therefore, the move will generate $300,000 in EBITDA. This seems attractive, but the risk and other factors leave you a bit unsure. However, if we look at the decision based upon your multiple, this decision could look much different. Assume you have been using Regal’s Value Acceleration methodology, and your multiple is 5.0. Therefore, this decision has the potential to add $1.5 million in value to your business. Does this cast a new light on your decision? You bet it does.
In our second example, the company is growing rapidly and needs to add an employee that will bring order to chaos by enhancing internal systems. The position will cost $90,000 annually, but through our Value Acceleration work, we know that these internal enhancements will increase our multiple from 5.0 to 5.25. EBITDA is $2 million, so this new position will not cost $90,000; it will add $477,500 in value (.25 x $ 2million, less $90,000). This second example also highlights a commonly overlooked driver of value within an organization: its structural capital. Efficient systems and processes are not “overhead”. If operating effectively, they should work to increase value.
At Regal Wealth Advisors, we give our small business owners the tools and knowledge to strategically grow the value of their most important investment. We offer the skills and knowledge of two Certified Exit Planning Advisors, Mike Zimmerman, President and Founder, and John Packer, Small Business Director. Mike and John are a uniquely equipped team with decades of combined experience in wealth management and small business consulting.
We invite you to contact our office at 717-838-3178 and schedule an appointment to learn more about how our exit planning process—a process that enables business owners to assess decisions based upon added value--can be one of your most important business strategies.
By John W. Packer, CPA, CEPA, MBA