What is your business worth if you wanted to sell it?
The value of a business can be a contentious issue, because more often than not, an owner believes that their company is worth more than it really is.
The owner may base their own company valuation on how hard they have worked to build it, how many hours they have put in, or how many years they have spent in that routine, successfully keeping their business afloat.
It is a common misconception that a potential investor should have to pay for the business owner’s effort and hard work. Many years ago, some buyers may have been gullible enough to buy a company based on the current owner’s contribution in blood sweat and tears, however today, investors are much savvier in their purchases. Today, the harsh reality of the matter is this: nobody wants to buy your job.
So, how do you know if you have a job or a business?
Most businesses that I come across which are looking to be sold, are owned by people in their 50’s and 60’s. They have been in business for 20 – 30 years and they are tired; they wish to slow down a bit and want some money back from the business for what they have put in.
Now, if a person has not looked after themselves, sadly this age bracket is also often the time when health problems can surface. Sometimes, the business owner may even find that they have to be taken out of the company for several months’ due ill health.
If you were taken out of your business for several months, with no communication via phone or email – could your company survive and grow without you?
If your business cannot survive for a few months without you, then what chance do you have of selling it?
There are some businesses out there will survive, but for the majority, where the owner is the biggest cog in the wheel, they won’t.
If you still exchange your time spent in the business for money, it means that whomever buys your business either has to do the same or find someone else to do it.
If you are in this situation, you are selling your job, not a business; who in their right mind would want to part with large wads of cash to buy your job?
Interestingly, this is the reason that most businesses are bought for a much lower value than the seller would like; the current business owner is often the limiting factor in the company’s sale value.
The main problem is that most businesses are not well structured.
When you started your business, did you ever ask yourself ‘where do I want to be in 20 years’ time? What do I want my business to look like? What do I want to sell it for?
Most likely, you didn’t, so instead, you’ve been going with the flow. In reality however, ‘going with the flow’ in business, is like doing a jigsaw puzzle without a picture for reference.
Sellable businesses have put great teams in place, they have strong management and executive structures that have allowed them to reach their full potential; they are not reliant on the businesses owner.
A second problem is that some companies are also poorly structured in terms of capital.
Jim Collins made a great point when he asked the question: ‘Is it the job of the company to serve the family or the job of the family to serve the business?’
Most people see their company as a cash machine; they strip out of the business as much as they can, but if no money is not retained within the company, then there are no funds to support growth.
Ultimately, when it comes to selling your business, an investor may see the ‘growth potential’ of your business but will also be aware that there is still some work to do themselves; this is where they will start to push you down on price. If you still have a ‘job’ and there has been no real growth in your business due to a lack of capital reinvestment – then who do you think holds all of the bargaining chips? The buyer, of course.
Many of my clients have managed to scale their business of the acquisition of poorly structure, poorly cash strapped businesses. Most of the time they purchase the business for a nominal amount, taking away the burden for the current business owner. By the same token I have had many of my clients sell for a multiple of 8x onwards, due to having a well-structured business.
So, if you don’t want to sell your business and are happy being the proverbial hamster in the wheel for the foreseeable, then carry on. If, however any of this has struck a chord with you and you think that things within your business need to change, get in touch.
Remember, failing to learn is learning to fail.