You will exit your business- you are not going to work forever. You may have a date in mind. However, you are not sure how to make it happen – how to retire and maintain your lifestyle. Do you have an exit strategy? You are asking yourself, “What is my business really worth?” “How do I grow it so that the value is where I need it to be when I leave?”
There are industry averages, typically multiples of revenue or profit. You have probably heard that a business in your industry is worth X times annual revenue or profit. However, what about your business?
I learned long ago, working in the mergers and acquisitions arena, that a business is worth what someone is willing to pay for it…basic supply and demand. Just as for your house, the value is what a buyer is willing to pay for it. Just because your home was worth $500,000 one year ago, it doesn’t mean someone will pay that now. If you get 10 offers ranging from $350,000 – $375,000, is your home worth $500,000? Not today!
So how do you build the value of your home? You might paint, update the kitchen, update your landscaping, etc., focusing on those things that will make it more attractive. When you look at home values around you, it is the “comps”, or comparisons in nearby home selling prices, that drive the first estimate of value. But did you add that new enclosed deck, remodel the kitchen, rebuild a bathroom? Buyers need to look inside to see the difference between your home and your next door neighbor’s home to see the difference in value.
Well, it’s the same for your business. What is “more attractive” for your business?
Your revenue might seem attractive. But if sales are declining, if you are not selling into the most attractive markets, if your internal processes have problems, if your staff members are not being trained, if you are not retaining key staff, if clients are not coming back…a buyer will not be willing to pay as much as he or she might pay if all of these issues were under control and running smoothly. Maximizing cash flow and ensuring operational excellence that does not necessarily depend on YOU will be very attractive features to a potential acquirer. These are just a few of the many important issues that impact business value.
Especially in these economic times, all businesses need to prioritize everything they do to make sure that investments of time and money support long-term goals and value creation – building business value is critical. And exit planning along with succession planning are key. The most important word is “plan”!
It is a lot to think about and can seem overwhelming to address all of these issues at once. Don’t try…get started step by step with a well-developed business plan. (You have a plan? How old is it? When is the last time you looked at it?) Are you and your partners on the same page regarding long-term direction? Working on the plan together will create agreement and become your framework for building value.David Shavzin, CMC