When people come to me about preparing their business to exit, their first statement is almost always, “I don’t know what my business is worth, if anything at all”. Then they ask if I can do a valuation to see if they would be able to sell and exit. There are two issues with this:
First – I am not a certified business valuation specialist. I will not be able to calculate an official value for any business. That said, I can see where value is, or is not, in a business.
Second – Starting with a number does not show you, or a potential investor, the actual value for you or them. Value is seen in what people are willing to pay.
So why do we all want to start with a number? Here are two short examples that will help us identify what the number does for our judgment.
Story One – The Car
My husband wanted to buy a new car. He looked online at the Honda he was interested in and then did some research around what his current car value was and made a decision what he could afford. He went into the dealership to buy a car and found out there were more options. He also realized the model he was looking at did not have the non-negotiable feature he required (adjustable intermittent wipers – Why these are not standards is a mystery, but that is for another story -). After a discussion and some negotiation, he got the next model up, for less than he expected to pay for the one he came it to buy. Why? because he had more value in his current vehicle and he was willing to go somewhere else to get the non-negotiable options he desired.
Story Two – The Home
There is a home on our street that has been up for sale for about 2 years. It is a lovely well-maintained bungalow. Many homes have easily sold over that time on our street. It is a desirable neighbourhood, walking distance to schools, mature lots, parks, and many other amenities people want. The home has been recently updated, including the addition of a separate, legal apartment in the basement. So why is it not selling?
My other neighbour and I were discussing this. We came to a few conclusions, but the one that really stuck for me was that it did not meet the needs of the buyers. It is too large for older people who are downsizing. It is too expensive for young people just getting into the market, and, without the use of the basement, it makes the home too small for a growing family that may also need an office in their home (as many of us do now).
What Value?
The value goes back to “know your market”. In the “Car” story, my husband knew what was important to him and the dealership knew that too. The value to him was in alignment with the value to the dealership. In the “Home” story, the seller did not know who was likely to be buying the home. The value to the seller is more than the value to the market.
Your Value?
Many accountants will use a simple multiplier to calculate the estimated value of your business (sometimes 2 or 3 times the annual revenue). The multiplier used can vary depending on the industry, the current economy, etc. But, this is just a number. Is it really worth that to someone else? The multiplier method assumes the next owner will make back their investment in a specific amount of time, but even this number is only a number.
Knowing the “number” that may or may not be the value of your business does not actually give you an idea of who would buy it nor if it can be sold. Start with what you would like to get from the business. Then put on your ‘buyer’s hat’ and evaluate what you would pay for your own business. If these two numbers are close, you have a better idea of the value. If they are not, you have a starting point for the work you will need to do to create the exit you have envisioned. Even if you don’t want to sell, this understanding will help you create a business worth more to yourself while you are running it. More profit, more time, more cash flow, more opportunities, and more freedom of choice.
Don’t start with a valuation, start with a buyer’s viewpoint and see where you can increase the value of your business now, so it will be worth more to you, and others, when you are ready to leave.
Do you want help finding the path to a business that can Run Without You? Choose one of these two free options to get started:
- Download the EXIT Readiness Checklist.
- Book a EXIT Readiness Assessment call with Barb.
This article is 100% original content – The articles you read in this blog are 100% created by Barb Stuhlemmer, not by AI.
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