What Else Are You Doing With Your Money?
When you start asking yourself, “What is my company worth?” it is tempting to directly value the items with the company. However, this does not begin to account for the true value, particularly if your company uses or creates proprietary technology. Opportunity cost, or what else you could buy with your money, is an often-overlooked but very important indicator of value.
Return on investment (ROI) is one of the most important indicators of whether a business is a good or a bad purchase. The higher the rate of return, the more money you are making for every dollar you put into it. When looking to buy a company, many investors want to know what your ROI is. Usually expressed as a percentage, ROI is equal to the annual gain from the enterprise divided by the cost of the investment. Whereas many other measures of value are subjective, ROI is not. It cuts right to the bone of the issue. Where investors can find more substantial returns on investments elsewhere, they will (and should!) take a different business opportunity. However, this calculation can also be swayed depending on what factors are utilized to derive it. For instance, is the ROI calculated on EBITDA, pre-tax earnings or after tax earnings and is the investment based on cash invested or cash and debt incurred? Knowing the manner in which ROI is being figured can help you determine how attractive an investment is when compared to alternatives.
Potential investors and those who are considering selling a business should also be considering what returns they could get on their investment if they choose to do something other than purchase a business. In many cases, savings accounts and bonds will return the least because they are also the safest investments. Generally, the riskier the investment, the greater the potential return. Recently, the stock market, which was averaging around 8% ROI, has suffered catastrophic losses. This has prompted investors to search for something less risky. Purchasing a business or joining an investment group has been a great way for those searching for substantial investment income to diffuse financial risk while still enjoying higher ROI than more traditional, risk-adverse investments.
When valuing your company, it is also important to remember that the dollar has recently suffered a loss of value. This means that your company may carry a higher value today than previously if you are an attractive candidate for an acquisition by an overseas entity that has been the benefit of the dollar swing or if you export your product line to countries with a more attractive exchange rate as sales may have grown significantly without a change in your company’s operation. Knowing what your company is worth will be easiest if you know how to utilize ROI and recognize the benefit of recent currency fluctuations.
