How Much Could I Get for My Business?

Using anecdotes from our case files about challenges that confront small business owners everywhere, let's explore some common business valuation misconceptions (and offer some helpful tips).

When we prepare a business valuation in step two of our four-step succession process, we ask owners what they think their company is worth and how they arrived at that value.  Here is a sampling of responses justifying their desired sales price (excluding real estate):

• Three times annual sales
• Five times net profit
• Inventory, fixed assets, customer list, trade name, plus 3x owner salary + net profit
• SOP, WAG (Seat of the Pants, Wild A** Guess)

Yes, those are actual responses to the question, “What do you think your business is worth and why?” We've heard dozens of creative answers.  What do you think is the right answer?

Let’s examine a typical business.  There are fixed assets, certainly: Furniture, Fixtures, Equipment (think Computers, Phones, Production Equipment, Tools); Inventory; a trade name; customer database; community reputation; good location; and more.  Maybe the total investment over the years is $500,000.  Plus, the owner gets a salary of $80,000 a year, and benefits!  Big investment!   Good salary!  Annual net profit of $100,000 too.  Comfortable living! This must be worth $1,000,000 or more.  I say, maybe, but maybe not.   Most times, NOT!  Why??

Not one of the items mentioned above produces anything.  None of them sell anything, produce anything, nor manage anything.   Everything is 100% dependent upon a person, using the fixed assets and inventory, to interact with other people, to do business. In other words, all of your investment in “stuff” is only worth a few cents on the dollar.  Almost the entire value of your business is predicated on its ability to produce income.  Buyers don’t need stuff; they need income.  The “stuff” can’t produce anything without the people; therefore, the value of your business and its likelihood of surviving your departure, requires the continuity of your skilled staff.  For, your “people” produce the income, using your “stuff.”  To ensure a premium value, you want to recruit, develop, compensate, and retain those that generate the cash flow – your people!

Finally, a company that relies on its owner for the company’s institutional knowledge, community relations, employee relations, and active management for success has the least value in the marketplace because, when that owner departs, everything leaves with him! Prospective buyers require confidence that the business will operate at least as well without the current owner, anything less diminishes its value.

Learn more about transforming your investment into a Perpetual Business: https://perpetualbusiness.co/