The question - what is my business worth? - Or similar valuation questions, are the most commonly asked by business owners contemplating a sale. Ironically, along with it being the wrong question, it is a difficult inquiry for even seasoned experts to answer correctly. Ask five valuation professionals the value of your business and guaranteed, you will receive five different answers.
In this article, I propose three questions to ponder before valuation considerations become necessary or relevant.
Let's first set the table with a few key (and hard) truths to help frame our discussion:
- Approximately 80% of business never sell. Consequently, for 80 of 100 business owners, valuation is simple - they don't get a seat at the table - and their company is worth zero.
- Of the twenty owners left at the table, roughly ten will liquidate or sell for book value. That is, the assets will be sold to a buyer unlikely to continue running the company. Valuation for these ten companies is also simple: Book Value = Assets - Liabilities.
- The ten owners remaining at the table, get to carve up the feast and share the splendour. Every blog, book, YouTube video, and seminar on business transition targets these few owners. For these businesses, appraisal becomes a prediction of how the market will value future cash flows.
NOTE - so you don't think I am a pessimist out here throwing internet punches, I have had my share of companies that never came close to getting a seat at the table, faded into oblivion, or were liquidated. I have also successfully sold multiple business, and simplified the process by focusing on the questions below.
If asking - what's my business worth - is not the right question, what questions should owners actually be asking?
Question One - Will my business attract a buyer?
24% of the listings on BizBuySell.com - 8,360 businesses - sold in 2018; indicating the other 25,000 listings stagnated, not attracting any buyers. Perhaps, the pertinent question for these 25,000 owners shouldn't be - what is my business worth? Instead, asking will my business attract buyers? Or, is my business even sellable? Would be a better line of questioning. Undoubtedly, if the goal is to sell, this line of thinking would get them to their desired goals more quickly.
Question Two - Is my business transferable?
I often contemplate why owners so infrequently consider transferability when contemplating a sale. For example, if a company's lease is not assignable, this issue is a deal killer, and there is a low chance the business will ever sell. What about franchise agreements, regulatory constraints, owner dependency, specialized licensing, or contract assignability? Regrettably, transfer restrictions dramatically reduce the probability of a successful sale. Perhaps, the question owners should be asking is - if someone wanted to buy my business, could it easily be transferred?
Question Three - How risky is my business?
Statistically, the small business asset class is one of the riskiest investments in the world. The average business owner makes peace with this by believing their skills and leadership will mitigate the riskiness of the venture; personality traits that will walk out the door when the company sells. Buyers are notably cognizant of this truth, along with the 45 other hazards that contribute to small business risk. Accordingly, if higher risk levels demand more substantial returns, and higher expected returns drive down the price, why is it that owners aren’t asking - how risky is my business?
Question Four - What is my company worth?
It is the author's opinion, only companies able to navigate the first three "hurdle" questions, need to worry about valuation considerations; as they are the only businesses the marketplace acquires.
CAUTION - valuation experts, appraisers, accountants, and brokers will be all too happy to take your money, perform a valuation and ignore key facts rendering your business unsellable.
To sum up, don't dwell on what your company is worth today, concentrate on transferability, and creating a predictable low-risk cash flow stream for a potential buyer. Focus on the first three questions in this article will earn you a seat at the seller's table, attract more buyers, and ultimately increase your price on closing day.
For those owners who have taken the time to implement transferability, predictability, and sustainability in corporate cash flows, here are a few great resources on business valuation which I find incredibly useful.
• Ken Sanginario - Valuation Podcast-
• Business Reference Guide - https://www.businessrg.com/
• Business Valuation Resources - https://www.bvresources.com/
For those more interested in how to reduce risk, increase transferability, and attract buyer interest, you are in the right place. The answers are here and free in our blueprint document.