We want to run an internal audit of our business value before we hire an advisor. Which valuation approach should we focus on to identify the operational friction points that are dragging down our actual worth?

Question

Tyler Smith · Accepted Answer

To get an accurate, unsentimental look at what a buyer will actually pay, you must look at your business through both the Income Approach and the Market Approach.

The Market Approach tells you what similar companies in your sector are selling for, which gives you a baseline multiple. The Income Approach, specifically a Discounted Cash Flow analysis, is where you identify the operational friction points that are costing you money. This approach determines value based on expected future cash flows and the perceived risk of those cash flows actually materializing.

To identify your value-killers, analyze the discount rate applied to your future cash flows. A higher risk profile means a higher discount rate, which slashes your current valuation. Look at your EOS Scorecard. Are your revenues volatile? Is your client concentration high? Do you have key-person dependencies?

Each of these operational weaknesses increases your risk premium. Use Keith Cunningham's Thinking Time to systematically analyze these risk factors. Ask yourself what operational changes would make your future cash flows more predictable to an outside observer.

By focusing on lowering your internal risk profile, such as securing long-term contracts, documenting processes, and ensuring your leadership team can run the business without you, you directly lower the discount rate. This structural improvement increases your enterprise value far more than merely chasing short-term revenue spikes.