WHAT IS YOUR BUSINESS WORTH?
Business Valuation is not an exact science!
You are not going to work forever. You may have a date in mind but aren’t sure how to make it happen – how to retire and maintain your lifestyle. Do you have an exit strategy? What about succession planning? See: Nine Ways To Exit You are asking yourself, “What is my business really worth – what is that business valuation going to show?” “How do I grow my business value to where I need it to be when I leave?”
There are industry averages around business valuation, 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 value? Every business in your industry cannot be worth the exact same multiple.
As a general rule, a business is worth what someone is willing to pay for it. 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!
There are things you can do to build value so that someone is willing to pay more than the real estate “comps”. You might paint, update the kitchen, update your landscaping, etc., focusing on those things that will make it more attractive. Sales of similar homes around you provide a first estimate of value. But what can you to do build on that?
It’s the same for your business. What can you do to make it more attractive and get a price higher than that generic multiple?
What you choose to work on should take into account your timeline to exit.
Here are some of the things to consider, if practical, given your exit target date:
- Add customers and look for ways to get more business with current customers. Can you tap into a new market?
- Getting a lot of customer complaints? Losing customers? Work on business process improvement – get things running more smoothly and get them documented. Reduce those complaints and improve customer retention. [More about business process improvement]
- A smooth running organization that does not necessarily depend on YOU will be a very attractive feature to a potential acquirer.
- Consider the level of expertise of your staff. Are all of your employees truly part of your team? Are they well-trained?
- Create or update your business plan and budget. Help the potential buyer to see the picture of continued growth.
These are just a few of the many important issues that impact business value.
Frankly, all businesses should have a plan and proactively prioritize use of their resources to build revenue and grow profitability in the present!! Approached the right way and reviewed regularly, this will also directly improve business value creation.
You cannot do everything – so assess priorities based on your goals, timeline to exit and your target value.
David Shavzin, CMC