What is my business worth? Ultimately, the person writing you a check for your business is the ultimate arbiter of the value of your business.
Unfortunately, that is not the time you want to understand what someone is willing to pay for your business and why.
Having a realistic understanding of the value of your business, why it is valued at that amount, and what that value means to your overall personal financial goals is critical.
The price that someone is going to pay for your business will be based on a multiple of a key indicators.
This means that the important thing for you to understand is the sooner you understand the value of your business and why it is being “assigned” the multiple it is getting, the more time you have to create a business of greater value.
If your retirement plan is built around the value of your business and that assumption is wrong, your retirement will look very different than planned.
For example, let’s start by exploring multiples. For simplicity’s sake, let’s assume multiples in your industry range from 1 to 10.
So, a business with an EBITDA of $1M and a multiple of 5 will sell for $5M. But what if you could get a multiple of 7 instead of 5? Now that $1M in EBITDA brings you a $7M sale price. An extra $2M (pre-tax) in your pocket. How do you move the multiple from 5 to 7? Well, surprisingly the answer isn’t through more sales, but creating greater value from the same level of sales and EBITDA.
There are certain factors that impact multiples, some within your control and some that are not. Let’s focus on what’s in your control.
Is the business well managed?
Let’s face it, no one thinks their child is ugly and similarly, every business owner thinks their business Is more beautiful (valuable) than it really is. Because of this, when you ask yourself “How much is my business worth?” you can’t only focus on the impact that you as a owner are having.
You have to understand where you business compares to the rest of your industry. For example, ask yourself:
- How do my financial results stack up to the rest of my industry?
- Do I have a strong functioning management team? If not, where are the gaps and what impact on value will filling them have?
- Are your key employees properly compensated and under some sort of retention plan? (Stock ownership, deferred compensation, etc.) If they aren’t, will they stay if the business goes under new management?
- To prevent employees and customers from leaving, do you have a culture of cooperation and collaboration?
- Are your systems and processes documented to the point that a buyer can step in and run the business?
A business can be profitable. However, if the growth of the business is leveraged too heavily on a weak management structure, your business will be limited in its growth potential.
This will, in turn, lower your overall value and lower your business worth when it comes to an evaluation and the ultimate selling of your business.
If you’re looking for better management tools for tracking your business, here is a list of 21 tools you should check out: 21 Best Small Business Management Software Tools.
Is the business growing?
A profitable business is always a good thing. It keeps the lights on and has helped many business owners live the life they always wanted. However, if a business has growth that is stagnant, your business value will decrease over time.
For instance, growth ensures that you keep employees longer with raises and allows you to have cushion room for new offerings. It also shows that the competition won’t overtake you in the marketplace, which puts potential buyers at ease.
Nobody wants to buy a business that they hope to profit on in a few years only to lose money due to not having enough growth.
To measure your growth, ask yourself these questions:
- Do I have a diversified client base?
- What are the opportunities for expansion geographically, product or service wise, vertically or horizontally?
- Does the business have a strong reputation that will be maintained for years to come?
- Do I have a solid, replicable sales and marketing process?
Is the business profitable enough?
Even if you are making money and your business is well managed, you have to have enough profits to warrant a buyer or potential investors to work with you. For your own lifestyle making 5% margins might be enough to live comfortably. However for a future buyer or investor there might not be enough wiggle room there for them to value your business.
Additionally, if your profits are sporadic, for instance higher in certain times of the year than others, then this needs to be taken into account during the evaluation process. Ask yourself:
- Are my clients paying me on time?
- Do I have strong gross margins that give potential partners enough room to also be profitable?
- Is my cashflow stable? If not, what do the dips look like?
- How have I financed the growth of the business? Is it overly leveraged?
Ultimately, what is the value of my business?
Addressing these issues early is critical to the success of your business. Because of this, staying focused on consistently improving how the business operates is a key exercise that should be started years before you plan to consider selling your business.
We are currently in a sellers’ market and this trend is not going to last. As the growing population begins to sell their businesses, there is expected to be a glut of business available for sale in the coming decade.
Because of this, we expect in the next few years to gradually see a shift to a buyers’ market. At that point only those businesses that are due diligence ready and considered “sale ready” will garner serious offers at reasonable multiples.
To learn more how we can help you create an efficient, cost-effective exit strategy and maximize the value of your business contact me at joe@blueskyexitplanning.com. Alternatively, you can check out the form below to schedule a no cost no obligation 30-minute consultation.
The Contingency Plan: Fulfilling Your Vision – Even if You Are Not Here to See It