What’s Your Business Worth?
Really? Will it be enough to meet your needs post-exit? How do you know?
By Tim Young & Michael Kenneth
As humans, it would seem that we have a love/hate relationship with the concept of value.
We tend to overvalue the things we have, or own, and belittle the value of things we don’t.
This is especially true of business owners. We tend to overvalue our businesses—in terms of potential sale price—compared to our competitors. Then we tend to discount the value of our competitors’ businesses.
Truly, hardly a day goes by that we don’t hear it:
If ABC Company got $30 million, we’re worth at least twice that.
Businesses in our industry sell for 12 times earnings. Book it.
As WealthPoint partners—all former founders or owners who sold their businesses—we were guilty of it. It’s an all-too-common occurrence based on our natural optimism as entrepreneurs. We compare and contrast with no real basis in fact.
But our point is not to tell you that you’re wrong about the potential value of your business. You could, in fact, be right. However, back of the envelop comparisons, or valuations based on industry multiples, are often misleading and create unrealistic expectations that can jeopardize our plans post-exit or in retirement.
Our point is that, unfortunately, many of us live a myth thinking that our businesses are worth a certain number. Moreover, we make plans and develop scenarios based on the mythical number. Acknowledging that—which itself can be a hurdle—the questions become, do you bust the myth now? Or do you perpetuate the myth and get down to the final mile and realize the value is not what it needs to be for you to step away and not worry?
Hint: There’s only one real answer: Be a myth buster. Debunk the myth now.
Every Business is Different
It bears repeating. Every business is different. Even ones that appear to be the same.
In making a value comparison of businesses in the same segment of the same industry, are you truly comparing apples to apples? Or are you comparing a business with a strong and experienced leadership team that makes strategic decisions, has documented processes and procedures, and a well-crafted marketing strategy that emphasizes its competitive advantages, to your business where you’re making all the decisions and employees just await your orders?
A certain value isn’t derived simply from showing up and competing in a specific industry. When it comes to business valuations, value derives from maturity and the eye-opening revelation that you’re managing an asset not running a business.
Maturity comes in the form of strategic and profitable growth, consistent financial performance, shared decision-making at the leadership level, documented processes and procedures, strong financial controls and other adult-in-the-room-type attributes.
On the flipside, it’s worth noting that a lack of these attributes causes a business’s value to deteriorate. After all, a purchaser isn’t interested in a buying a job—your job where you make every decision. They’re interested in buying a mature, operating asset.
Industry multiples are much the same. In the private company world, there are no disclosure requirements. Sale multiples are rumors, at best. The level of assurance of the financials in a publicly traded company versus a privately held company is typically drastically different. The same comparison factors described above apply here, too.
Make multiple comparisons at your own risk. Instead, focus on building your own value.
Plan Before You Act—It Starts with You
Exit planning begins before you set out to determine the value of your business.
It begins with a crystal-clear understanding of your personal goals and objectives, and your business goals and objectives. These factors merge with the financial aspects of your business along with the relationship factors in your life—the people who are either emotionally or financially invested in your journey with you, e.g., spouse, children, key business associates, employees and others—to determine what’s possible. Keep in mind, it’s not all about you.
This process—which is a precise discovery technique at WealthPoint called Know Your Story®—engages all stakeholders with the purpose of combining your aspirations with raw data to make informed decisions.
For example, if your current personal spending level is $30,000 per month, what happens when transaction proceeds can fund only $15,000 per month? We have yet to meet an entrepreneur who knowing the facts would opt for that choice.
But if that were to be the likely scenario, knowing it 10 or 15 years before exit leaves enough runway to build the business to earn the required valuation. Then, the focus turns to identifying and focusing on the things that add and maximize value: the things within your business and within your control that positively differentiate you from your competitors to create a mature operating asset.
Maybe most important, the process provides clarity, emotional buy-in and freedom from the weight of not truly knowing. The freedom that comes from looking at the future differently creates intense focus because the vision has become clear.
At the end of the day, it’s all about clarity. Don’t guess, make assumptions or just hope that you’ll meet your goals. Be brave. Be a myth buster instead.