Many entrepreneurs have most of their wealth tied up in their businesses.
The value of the business is most heavily influenced by its ability to generate free cash flow, generally measured using EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). The most common valuation method for privately owned businesses is based on a multiple of the free cash flow the business generates. The multiple is based on several factors including historic growth of the venture, strength of the industry, strategic advantages of the company, and specific industry valuation standards. The degree to which the entrepreneur is able to improve cash flow through bootstrapping techniques and other prudent management techniques the higher the value that can be created for the business.
As the recession takes hold many entrepreneurs are reporting that their profits are declining. This means that the value of their business is going down as well.
So just as wealth is disappearing on Wall Street, it is also disappearing on Main Street. We just don't hear this discussed as often.
Although it may not be a very accurate measure of this, the BizEquity website's running index of business values paints a stark picture.
So what's an entrepreneur to do? Focus on stabilizing profits in the short-run and growing them in the long run. Always remember that Profits are what matters, not Sales.
If you can begin to grow profits the value of your business can quickly rebound.
Leave a comment