A common phrase you hear in business is “you have to spend money to make money.”
Unfortunately, too many small business owners spend more money than they actually have…all in the name of getting their company off the ground or taking advantage of the next perfect opportunity. They hope that the money they bring in tomorrow will cover the money they’re spending today.
The end result of that kind of business strategy is a lot of debt.
One company owing money to another isn’t a cardinal sin of doing business. It happens all the time. For this post, we want to focus on how much debt is reasonable as a percentage of a company’s overall EBITDA (a common measure of cash flow derived as earnings before depreciation and taxes, depreciation, and amortization).
What if you had a quick way to measure how your company is performing from year to year?
An often-used phrase in business is that you can only “expect what you inspect.” If you aren’t regularly checking to see how well your company is doing, you are missing out on valuable information and quite possibly setting yourself up for trouble.
By using your business value as a benchmark, you can quickly check the pulse of your company and tell if it is generally healthy and improving year by year or has problems that need to be addressed.
2020 dealt a significant blow to nearly every sector of the U.S. economy, and bank stocks were possibly the hardest hit. While the overall stock market began to improve in the second half of the year, the banking sector continued to suffer.
Concerns over low interest rates and loan losses from struggling businesses created a lot of uncertainty. The result was that bank stock prices did not climb along with the rest of the market.
2020 was a pretty wild ride for all kinds of businesses.
While we’re all glad to see it in the rearview mirror, there are some after-effects regarding valuations that you might want to consider.
Many businesses report “goodwill” on their balance sheets. Goodwill is an intangible asset on a company’s books that reflects the amount of the purchase price paid for a company’s net assets above the fair value of acquired tangible and other intangible assets in a sale transaction. Unlike some other assets, goodwill does not necessarily amortize over time, but it can be worth less than its original value. (More on that in a minute.)
When it comes to the process of selling your business, there are several things that can ruin an otherwise good deal.
Over the years, we have seen plenty of deals go off the rails. It’s always an unfortunate event. Like we mentioned in our previous post, it can happen when owners and buyers can’t see eye-to-eye on the value of the business. When owners are unwilling to budge in spite of all the evidence pointing to a lower value, many buyers will simply walk away.
There are plenty of other factors that have the potential to wreak havoc on a transaction, including but not limited to: