Enterprise value

BY MATTHEW D. MOHR

Entrepreneurs create value through building a profitable ongoing business enter pr ise. How much a business is actually worth is not easy to calculate, but simple in practice to determine

Many factors come into play when deciding what a business is worth to a buyer. Cash flow available to the owner/investor is of primary importance, especially if the purchaser uses the discounted cash flow model of valuation commonly taught in business school Different industries carry greater valuations.

Revenue growth, operating margins and operating expenses compared to revenue have a great impact on the enterprise value. Employee productivity relative to others in the industry, employee longevity and management/leadership retention all factor heavily into a purchase price decision, especially in our region currently

Recently I reviewed a very interesting regional business for potential purchase which carried all the components for success, except one The business had good margins, was profitable and had shown very nice growth and the owner did a good job managing the business, but unfortunately the owner/manager was interested in retiring relatively soon.

I thought I had a good idea of what the owner expected to sell the business for, which wasn’t terribly out of line But after factoring in the risk and cost of losing the owner/manager, my business valuation was a fraction of what the owner thought the business was worth, and the value to me was actually less than the current assets on hand

Most enterprises are eventually sold or passed down to the next generation in the family Either way, the owner needs to figure out the value of the enterprise before transferring ownership.

My father always said something’s value was only what someone was willing to pay for it A simple formula, but very true in practice What any enterprise is actually worth is subject to debate, but ultimately it’s only worth what someone will pay for it PB

Matthew D. Mohr CEO, Dacotah Paper Co mmohr@dacotahpaper com