05 Oct Growth Boosts Value Skyward
What is the ONE characteristic of a business that drives buyers mad? That will cause business buyers to lose their ability to negotiate aggressively? Cause them to throw dollars at you like they’re rubles?
Deliver four years of solid, year-after-year growth exceeding 25% and you’ll be the darling of the ball. Every buyer will want to dance with you.
A look at the valuation equation shows it’s elementary:
p = e / (k – g)
where: p = price
e = earnings
k = discount rate
g = growth rate of earnings
The discount rate is also referred to as the required rate of return. Required rates of return for small and mid-size private companies are in the 25% to 33% range. So, if the growth rate is zero, earnings are $100K and the required rate of return is 25%, the value is $400K. Use the same data but a growth rate of 20% and the value becomes $2 million [$100K / (25% – 20%)].
Yes, growth is sexy. Find a way to log four years of solid growth and you will have found a ticket to a premium sale price.
Easier said than done? Of course. To the few go the spoils.