Company valuations is quite a contentious issue. Why? Because most people overvalue their business. Really they base their valuation on how hard they have worked, how many hours they have worked, and how many years they’ve managed to successfully repeat that mind-numbingly boring routine.
For some reason, they think that we have to pay for effort and hard work when we buy someone’s business. Now, maybe 30 years ago, people would have been really that gullible, and say, “Yeah, do you know what, I’ll pay you that money.” But these days people are far more savvy and the reality is, people no longer want to buy your job.
So how do you know you’ve got a job? Well, firstly think about it, do you really have a business? Now, the majority of businesses out there that I come across that are looking to be sold, are people that are predominantly in their fifties and sixties, so they’ve probably been at it for say 20, 30 years, they’re getting a bit tired, they want a little bit of something different out of life, and actually, they want some money back, because they don’t want to keep working at the pace and ferociousness that they have done for say 20 odd years.
The question is really, at 50 and 60, some people are blessed with impeccable health because they’ve made all the right choices and have taken care of themselves, and others are not. Now, what would happen to you and your business if you had to be taken out of your business for four months due to ill health? Now, that’s very common, especially when you get to your fifties and sixties, you just don’t know what’s going to happen, and you’re taken out of the business. Now, what I mean, taken out of the business, I mean you can’t communicate with them via phone and you can’t communicate via email, so you’ve got to let the business run by itself. Can the business survive and grow without you?
Now, there’ll be businesses out there that can. But for the majority, because they’re the biggest cog in the business, and the sort of proverbial hamster on the hamster wheel, most people cannot. You can imagine, if your business cannot survive four months without you, what chance do you have of selling it? Because the reality is you’re selling your job. Now, there are going to be some gullible people out there, they’ll say, “Okay, I will buy your job.” I mean, that’s fair enough. They’ll probably get what you want for it, but that’s quite as rare as rocking-horse pooh to be truthful with you. The reality is, that doesn’t really happen.
Most businesses, for an investor, they’re bought at much lower market valuation than most people would like. Really for investors most businesses are a sale. Why are most businesses a sale? Because the business owner themselves are the limiting factor in the business. So what do you have? What do most business owners do? Well, the majority of them exchange time for money. Which means, without the business owner in there, either you have to do the job or you put somebody else in. So you’re really buying a job. Very few businesses out there are actually properly structured. So they don’t have the right team, they don’t have the right management structure in place, most of the time they don’t have an executive structure in place. Therefore, the business never realizes its full potential.
And thirdly, the biggest thing I come across is actually, most businesses are poorly structured in terms of capital. They are under-capitalized. So, what do we mean by that? Well, Jim Collins has made a really good point when he asks the question, “Is the job of the company to serve the family? Or is it the job of the family to serve the business?” Well, most people see the business as a cash machine, and they strip out of the business as much money as they can. And a lot of entrepreneurs, they think, “Well, I don’t want to pay tax, so I’m not going to declare profits,” etc., blah, blah, blah, make it look as little as possible, enjoy the benefits of their cash, and then when they come to sell the business, well, they want to sell the business and profits just are not there.
Because the money is never retained in the business, the money is not there to grow the business. So, as an investor you come in and you’re thinking, “Okay, well I can see the potential in three areas. It’s not worth what the business owner wants.” Nine times out of ten the owner’s quite desperate to sell anyway, so you start really high, you end up quite low. Guess who makes all the bargains, guess who makes all the money. It’s going to be the investor, because they know exactly what they’re looking for.
As a business owner, let me ask you this, when you started your business, did you actually ask yourself the question, “Where do I want to be in 20 years time? What do I want my business to look like? What am I going to sell it for?” The answer quite frankly is, “No.” So it’s like doing a jigsaw puzzle without no picture. You don’t know what you’re putting together, you don’t know what you’re building. You’re just going with the flow. So, if you don’t want to sell your business and you’re happy being the hamster on a hamster wheel, carry on doing what you’re doing. However, if you are serious about thinking, “Yeah, maybe something needs to change. I would love to sell my business.” Head over to Boolkah.com and get in touch. Remember, your business isn’t going to sell itself. You need to be the change. You need to make the change. And failing to learn is learning to fail.