How the Relationship Between Risk and Return Affects the Sale Value of Your Company

In our Value Builder series we explore the eight key factors potential buyers review when looking to acquire a business – maybe yours!

How the Relationship Between Risk and Return Affects the Sale Value of Your Company

“If you want the most reward you have to take the most risk.”
– Jesse Itzler, Entrepreneur

Managing the delicate relationship between risk and return will help determine how successful your business will be, while also discovering what investments you should consider to continue to grow.

The price an investor is willing to pay for an asset relates to how risky he or she perceives the future stream of profits to be: the riskier the investment, the higher the return an investor will demand. Today, investors can put their money into relatively safe bonds and get a few percentage points of return, or they can buy a balanced portfolio of big-company stocks and expect perhaps a seven or eight percent return over time.

However, when buying a relatively risky business rather than a balanced portfolio, investors will expect a much higher return on their money. For illustrative purposes, imagine an investor is looking for a 50 percent return for buying your business because they deem your future stream of profits to be very risky, given that your revenue has been inconsistent over the last three years.

The same business projected to generate $1,000,000 for the next 10 years is worth less than half as much when, due to perceived risk, the investor may demand a return of 50 percent instead of 15 percent.

The Relationship Between Size and Risk:

Mergers and acquisitions professionals refer to a “small company discount,” which often applies because of the perception that very small companies are riskier than larger businesses. It is generally understood that larger businesses are more substantial and stable organizations because they have found a way to grow beyond the efforts of the owner(s) and are therefore less reliant on them.

Due to this perception, the size of your business will affect your Value Builder score, one of the factors you can use to help determine the value of your business.

You can get your Value Builder score by investing just 15 minutes of your time to complete an on-line questionnaire that is part of a system developed by internationally recognized small business expert John Warrillow and being made available at no charge through The Osborne Group. Your answers will help determine what drives up, or undermines, your company’s value.

Your answers to the questionnaire will generate a detailed report that an Osborne Group Certified Value Builder consultant will review with you during a complimentary two-hour meeting.

In future blogs, we’ll examine other Value Builder factors and their impact on your company’s worth. Follow us here for the series:

http://localhost/osborne/category/osborne-insights-blog/

To find out how your company is performing, click here to take the Value Builder questionnaire: http://www.thevaluebuildersystem.com/osborne-group