Valuing a business model is like debating who would win in a fight between Batman and Superman: the facts and figures, in the end, are devoid from the real world, and therefore meaningless. Without fickle market factors like clients and location to add to the valuation, we know about as much about a real business as we do about two tight wearing titans battling in the sky (Superman wins, by the way).
That being said, sometimes it is necessary to determine the business gross profit valuation. For starters, a bank will never OK a loan on a business model that hasn’t been shown to earn a profit. Without first obtaining a valuation on a business model, banks will look at your business model like a game of chance with no guarantee on loan recovery.
Prove to the bank that your business model will earn you enough money for prompt loan repayment. The best way to go about this is to take a look at your profit as a ratio of your expected expenses versus your proposed income. Whatever free cash you have left over from your revenue after expenditures will be what you will be able to dip into for loan repayment.
The trick with business formula valuations is that there are many, many hidden factors which could affect your bottom line. There is no sense in going into a business (especially a proven franchise), without first analyzing all of the cogent details.
A good place to start your valuation process is to analyze local businesses in the same industry group. By establishing the going profit rate of a similar business, you are one step closer to establishing the potential of your business model.
Of course, by adding one more similar business to your market, you may be diminishing the profits of the whole. This fact has to factor into your calculations. If you are hoping to introduce an industry into a community with no similar businesses (usually a smart move), then look to businesses in cities or towns of a similar size and demographic to yours.
Once you have established both your potential for profit, and analyzed a real world example of a similar business, you will be ready to decide if your business model is a stud or a dud. If everything still appears rosy after your informal valuation, you may be ready to approach a bank about funding your enterprise.
At the same time, you may wish to consider having a professional evaluation done on either your business model, or on similar real world businesses. Whether you are a business owning novice or an old hand, you probably already realize that there are many hidden factors that affect a business’s profitability.
If you are worried about a given business model, a trained professional should be able to spot any unfortunate loopholes. The trained eye of a valuation expert should be able to see any mitigating factors that could lower or even obliterate the profit margin of a prospective business. Taken to the real world, many of the businesses that thrived in Gotham City will be done for in a year in NYC.
© Peter Siegel, MBA - All Rights Reserved
www.USABizMart.com
--------------------------------------------------
About The Author: Peter Siegel, MBA is the Founder & Principal of USABizMart.com - USA Businesses For Sale, one of the most popular business for sale related websites on the internet. He is also the author of three books on the topic of business sales and how to buy a business. The most current book is "Businesses For Sale - How To Buy Or Sell A Small Business". Mr. Siegel also writes a daily Business Opportunities Blog – at www.USABizMart.com/blog that covers all topics on selling, buying, valuing, and financing small to mid-sized businesses.
--------------------------------------------------
Attn: Website Owners & Ezine Editors: Feel free to reprint this article in its entirety on your website or Ezine so long as you leave all links in place, do not modify the content and include the resource box as listed above. Thank you.
|
