Enhance Your Sales Strategy with the Sales Evaluation Program for Small Businesses

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okay welcome everybody uh in this video here what i'm going to try to do is explain to you business valuation and we're going to do it in as simplified terms as i can give it to you because business valuation applies whether you're going to sell your business or whether you're looking to buy a business and we need to think about it in terms of how do we value a company if you like what we're seeing here make sure you like and subscribe we are on all the socials we are on twitter facebook instagram and youtube make sure you're subscribing liking whatever it is you need to do to make sure you're following us if you like these videos and you want to see more of them uh now let's dive into what it takes to actually value a business and i'm going to cut through a whole bunch of stuff because there are tons of things that that ultimately impacted interest rates impacted inflation impacts it growth of earnings impacts it decelerating growth impacts it are you in a safe business with recurring revenue are you not ultimately i'm going to teach you a very simple way to think about this that's going to cut through all that type of stuff and it'll help you value a business whether you're buying or whether you're selling a company so the thing to think about is always what is your absolute if you have a dollar and that dollar is going to go get invested somewhere what is the absolute least risky place you can go and invest it well the least risky place ing to every other financial metric is the us government bonds so where are they trading today well the us government 10-year bond is trading at roughly two percent today so if you take a dollar and you give it to the us government they're gonna pay you two percent on that dollar for the next ten years and then they're going to give you your dollar back hmm well what does that mean in terms of an earnings ratio well if you think about it that's 50 times earnings isn't it because it takes you 50 times to get back your dollar so 2 2 is a 50 earnings ratio if you start going up the ladder and you buy more corporate bonds and you get a 4 rate of return that's at 25 or 25 times earnings as you get riskier and riskier with your asset classes you go up into real estate you go up into stocks and bon other stocks big company stocks little company stocks you start getting into private company investments or maybe even venture investing which is the most risky type of investing you can do where do the expectations start to lie it is all a relative interest rate based on what that risk-free uh rate of return is which is that two percent so in today's environment when we're looking at this what are people looking at when they're trying to figure out how much they should get as a rate of return well probably somewhere in the neighborhood of i don't know 20 as a rate of return if you're buying a small business that's probably a minimum target what does that mean in terms of a multiple of earnings it's a five they're all divisible by 100 makes it very easy if you're trying to target a rate of return or if you're trying to back into some sort of multiple of earnings you just divide it by a hundred and it makes it very easy to figure out either way wherever you're going so small businesses are typically going to need somewhere in the neighborhood of a 20 rate of return but what if my small business is very predictable and it's recurring revenue and i retain 99 of my customers all the time okay well then maybe you don't need a 20 rate of return maybe you only need a 12 rate of return on that business what does that mean that's an eight times earnings multiple oh okay so it is an estimation of what you need as a rate of return to compensate for the increased risk you're taking versus what you could get if you just gave the money to the u.s government and took a risk-free rate of return so when you're thinking about valuing a business you can factor in all of these other components but ultimately the goal is to figure out what rate of return do i need or what rate of return do i need to provide if you're selling a business to somebody based on the overall risk in this business versus the risk that they could get if they went and put it in us government bonds and again the easy way to do this is if you figure out your percentage you divide it by a hundred if you figure out your multiple you divide it by 100 to figure out your percentage it goes both ways and it's very very simple and that's an easy way for you to figure out what your business is worth figure out businesses you're going to buy or work and what ultimately you need to do to create less risk in your business to drive value up or if you're buying businesses recognize the risk that's in the business so that you drive the value you get i hope this has been helpful again if you like what we're seeing here you like what we're talking about make sure you like and subscribe on all of these insta grams twitters facebooks youtubes everywhere all those channels we would love to have you see more of this kind of content in the future thanks again for listening you