What’s the difference between Income and Value
What’s the difference between Income and Value and why should you care?
When we work with companies, we try to help them improve both. Income is the profit you are bringing in today, this month, this year. It’s basically the amount of money that shows up at the bottom of a Profit & Loss Statement. Accountants call that number EBITDA (Earnings Before Interest Taxes Depreciation and Ammortization). HUH?? It’s bottom line profit before your CPA takes out the allowable deductions to reduce your tax burden. It really is your financial report card as to how profitable your business has been over a period of time. If you’re working with Contractor Succession, our first goal is to help you improve that number. Sometimes that means increasing revenue, other times it means raising your prices, still other times it means improving efficiencies or cutting costs. Any or all of those actions could and should make you more profitable regardless of your exit time frame.
Value is something a little different. The value of your business is ultimately what someone is willing to pay for it. One way buyers evaluate a businesses value or worth is by taking the income or EBITDA and multiplying by a number. In our industry, that number can be anywhere from 1 to 5 in most cases. A company with a low value could be calculated with a low number while a higher valued company could have a multiplier of 3, 4 or 5. Obviously as a seller, you want that high number multiplier.
What determines that number?
There are numerous factors that make up that multiplier. In the HVAC and Plumbing industries, one of the best “adders” to your value is recurring revenue such as maintenance agreements. Other items include business systems in place, management or leadership, marketing and advertising, reputation, accurate accounting procedures and data, etc., etc. Our State-of-the-Union assessment allows us to look at all of these tangible and intangible assets that add or decrease from the overall value of the business.
Working with Contractor Succession on an ongoing basis, you will realize the short term benefits from increasing your income as well as the long term benefits of increasing the value for an eventual sale or transition. Why not do both? You might as well make more money on your way to a solid payout as you exit.