In today’s environment, it’s important for business owners to focus on the value of their company and what drives it. The objective of this article is to look at value drivers for operating businesses, as opposed to businesses that are asset-based, such as real estate or securities holding companies.
Under the market and income approaches, operating businesses are valued based on how much cash flow they’re expected to generate in the future. In other words, cash flow drives value.
If you want to increase value, you need to increase sustainable cash flow. Notice, we said the sustainable cash flow. While it might look good to have a short-term increase, an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price.