If you’re a small business owner, you may be wondering, “What’s my business really worth?”
After all, the value of your company impacts many personal and business decisions - including whether you should sell or continue to invest in your company. It also plays a major role in whether it’s the right time for you to retire.
One of the most pressing questions small business owners have, in fact, is: Will my business pay for my retirement?
It can be dangerous to compare your business to others in hopes of getting an answer. Just because one friend’s company that is smaller than yours sold for $4 million doesn’t mean your company is worth at least $5 million.
So, what should you know to get a more accurate picture of what your business is really worth?
What Challenges Lie Ahead
In 2018, the number of businesses that sold hit record levels, with an online business for sale marketplace reporting a 4% increase over 2017 and 31% over 2016.
Over the next decade, six out of ten U.S. business owners plan to sell their companies (Source: BizBuySell.com). Many of these owners are Baby Boomers, who want to fund their retirement with the sale of their businesses.
For those who are considering selling their businesses, does this rosy picture mean big dreams or a big nightmare lies ahead?
Potential sellers face two major challenges that could impact the worth of their business:
- Many small business owners are preparing to sell their operations during a period of unprecedented competition, as outlined above. The sheer volume of businesses that are hitting the market due to aging boomers looking to cash out for retirement will mean that potential buyers will have a multitude of options from which to choose. More supply of businesses for sale with fewer potential buyers will inevitably lead to downward pressure on prices.
- Many business owners are not prepared to sell their businesses, nor get top dollar. Unlike real estate or stocks, closely held businesses require one to two years or more of planning to sell, and owners must continue to build value even after the decision has been made to list the company for sale. That means just because you want to sell now doesn’t mean you should.
Whether You Have Realistic Expectations
The biggest challenge for anyone wanting to sell, including Baby Boomers, may lie with how realistic expectations are when it comes to a company’s value.
Most small business owners do not know how to properly value their businesses and grasp onto delusional valuation figures based upon money invested into the business, or worse, on the needs for a successful retirement.
It’s critical when determining how much your business is really worth to be realistic. When it comes time to sell, many business owners are SHOCKED to find how little value they may have in their company and how underfunded they are when it comes to their retirement goals.
Our article, Will My Business Pay For My Retirement?, further delves into why the answer to this question is complicated and what you should consider before making a final decision on your future.
The Factors That Go Into Business Valuation
Business valuation is part art and part science.
While many valuation experts and business brokers commonly start with gross revenues when placing a sales price on a company, this is only a starting point to the discussion. There are many other factors that go into placing an appropriate value on a small closely held business.
All companies have different moving parts, and no two are alike. Factors that should be considered when placing a sale price on a business include:
- Dependence on a handful of customers
- Financial structure, level of indebtedness
- Historical growth rates of the business
- Quality of product pipeline
- Competence of second tier management
- Market share
- Minimum size (attractive valuations are difficult to achieve when sales are less than $10 million)
- Sales pipeline
- Share structure
- One year of losses require at least two great years of profits immediately after those losses
Other questions you’ll need to ask yourself center around the sustainability of your business:
- Is it agile and flexible enough to change with market conditions? This is important since although the economy may be strong now, it’s likely to fluctuate. Presenting a strong argument that your business can withstand a down economy can enhance its worth.
- Does it have a strong performance history? This is one of the first areas a prospective buyer is going to examine. This can have a significant impact on the worth of your business. Important areas to consider include how long a strong performance has been sustained, or whether your business has experienced an upward trajectory in performance.
- How does your business compare to its competitors? It’s important to note your competitors are those that offer a similar product or service. However, other factors can be considered as well, such as location, size and similar buyer personas.
Owners must dig deep to unlock the true value because in the grand scheme of things it is not what the owner thinks the business is worth, but what someone is willing to pay for the business that matters.
The Role Of You
When considering the worth of your business, one of the most important questions you should ask yourself is: What role do you play in the value?
In other words, if you were to leave the business, how well would it function? If the answer is “not so well,” you may have a serious problem when it comes to business valuation. You see, a prospective buyer is going to view YOU as what is worth a high value - NOT your business.
Businesses that are dependent upon their owners for success do not tend to be valued as greatly as those that can run themselves. That’s because when you leave, so does the knowledge of how to effectively operate your company.
This is why preparing your business for sale is so important in order to get top dollar. As you are making preparations, begin delegating your tasks to trusted employees and managers so that you can show a prospective buyer that you’re leaving the company in good hands.
To sell a business in the coming years, you must be able to determine what will make your business more attractive to prospective buyers and begin your planning process with that in mind. This is a critical component in determining what your business is really worth.
You must also focus on growing the key drivers of your business and invest in sales, marketing and business infrastructure if necessary based on those drivers.
The bottom line for business owners planning on listing their businesses in the near future is that it is vital that the process begins now.
Bill is the CEO and Founder of InTouch Marketing. Bill drives the vision and direction of InTouch except when England's playing in a soccer tournament, because everything stops!