Why stock can suck?

How to suck the goodwill out of your business valuation in one easy lesson!

You will see stock increasing in value to the right. You will also see the stocks value increasing as a % of the overall sale price.?

Stock = Cash

Remember that stock is just your cash. When a buyer pays you for stock, there is no goodwill or profit component. You are just getting paid back for something you already own.

Multiples = Time

Importantly, not every buyer will wait 6.5 years to see a return on their investment. Business is generally to risky and a lot can happen in that time.

If the industry average multiplier of profit is a maximum 3.5 then as per the last 2 lines in the above table, stock in some instances will constitute the bulk of the businesses sale price.

Do you want to sell your business for stock you already own or do you want some goodwill??

Takeaways

1. Minimise your stock as much as is practical.?
2. Maximise your stock turns.
3. Be aware that stock can impact your business value. It can turn a valuation from an earnings one into largely an Asset based sale.?

On the plus+ side

Stock is of course essential for many businesses such as manufacturing or import & distribution. Without it your business may grind to halt. Just appreciate that when you go to sell your business, stock can play a critical roll in the valuation and it goes up in importance the more stock you have in stock!

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