Leverage Every Dollar of Profit

Posted on Aug 30, 2012 | 0 comments

profit

Did you know that every dollar of profit your business makes per week can increase your businesses value by between $100 – $250?

Most businesses are valued using the capitalisation of profits method which works by multiplying your business’s net profit by a capitalisation rate to arrive at your value.

$ANNUAL PROFITS x CAPITALISATION RATE = $BUSINESS VALUATION

So if you make an “extra” $1000 profit per week for the year and you have a capitalisation rate of say 3.5 your business will be worth an additional $182,000

Most businesses have capitalisation rates in the range two to five times (2x to 5x).

The capitalisation rate is based on the level of risk to a prospective purchaser. So the greater the risk to a purchaser, the lower the capitalisation rate and the lower the businesses value.

Conversely, if there is less risk to the purchaser, the capitalisation rate will be higher and so will the valuation.

Consequently the best way to increase your businesses value (and selling price) is to:

-          Increase your annual profits;

-          Increase your capitalisation rate; or

-          Do both…

If you would like your business to be worth more, it’s in your best interest to leverage every dollar.

To get maximum results you should implement strategies that reduce any risks to potential future owners as well as generate additional profits.  Not only do you get the benefit of increased profitability but your business will be worth more should you decide to cash out or refinance.

How JWA Business & Wealth can help

The JWA Business Strategy team can assist you and your business by helping develop strategies appropriate to your business. We are expert in valuations and improving value. Feel free to call us at any time and have a chat about your business. Call 07 5585 8555 or email haydn@jwa.com.au

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