What’s Your Business Value Strategy?
Have you ever wondered what your business is worth? I don’t mean what you would like to get for it; I mean the amount someone would actually pay you for it. Do you know what conditions or attributes make your business more valuable? How about those that make it less valuable? As best-selling E-Myth series author Michael Gerber said, “The only sane reason to own a business is to sell it”. It might be tomorrow or 20 years from now, but creating a highly valuable and saleable business is, after all, one of the principal goals of business ownership. Not only that, it’s an activity that begins the day you open for business and never stops!
So, let’s give it some attention. There a number of ways businesses are valued, depending on the industry and type of business, whether it’s a service business or one that is capital intensive, such as a manufacturer, or whether it is a business with a recognized formula for valuation. Without going into detail, businesses are most commonly valued as a multiple of a certain calculation of its net earnings. In other words, a buyer is willing to invest a certain amount of money to get a certain return from the earnings of the business, and the amount they are willing to invest depends on the earnings. Simple enough.
The return on investment the buyer is willing to take will depend on many factors, such as the risks associated with the business, its growth potential, the ease of learning how to run it, and so on. There are many factors which make a business more valuable, and of course, many that make it less valuable. We won’t be able to address all of them in this short article, but let’s look at the top six in each category. As you read them, check the circle in front of the ones that apply to your business currently (be honest). Then, add up the number of “Detractor” check marks and the number of “Builder” check marks and subtract the first number from the second. If you get zero or a negative number, you have a lot of work to do. If you get a positive number, there still may be opportunities to significantly increase the value of your business.
The Value Detractors:
- Over the last 3 to 5 years, the revenues have been flat or declining, or the business is not profitable;
- The business depends heavily on the owner or certain key people to operate effectively;
- Finances are not well documented and there are too many “off ledger” financial activities;
- There are no clear and documented marketing, organizational and operating strategies and systems;
- There is a negative trend line in market share, with few new customers each year and a very large percentage of repeat business, especially coupled with an aging customer base.
- There is little to distinguish the business from its competition—it is a commodity (in the mind of the buying public—not yours).
The Value Builders:
- The business is profitable and has had a steady growth in revenues, or has a specific written and credible strategy for increasing revenues;
- The business has documented systems for all of its critical functions and it is the systems that run the business, with people running the systems;
- The owner could leave for periods of time without the operation of the business being impacted in any significant way;
- The financial and accounting records and the business tax returns are consistent and well documented;
- There is a positive trend line for market share advances and both new client acquisition and existing client retention percentages are high.
- The business has developed consistent and predictable customer relationship processes that are difficult for its competition to replicate, thereby creating a sustainable competitive advantage.
If the “Detractor” listing described one business and the “Value Builder” listing described another, which business would you be interested in buying? How many more buyers with deeper pockets do you suppose there are for the business with the second list of attributes? Are you spending time developing your business’ value, or just spending time working IN your business?
Isn’t it time to get busy doing the right work and addressing the right issues in your business? Begin to redesign it now, not just when you are thinking of selling. When you do, you will not only create something of significantly greater value upon sale, but you will have a business that gives you value, joy and satisfaction while you own it. And above all, get a Business Coach! It has been quantified many times over that your chance of taking your business to the next level on your own is less than 4%, and with a Business Coach it is greater than 80%! Why take chances with what is potentially the greatest asset you own.
“E-Myth Mastery is incredible! My business was disorganized chaos, and now I am able to take a different approach and look at my business more systematically. It’s given an insight into all aspects of the business, from the simple to the complex. I understand and know more about operating and financial statements. I know and understand my cost. I have a more definite idea of who my customer is, how they make a decision, how to market to them, and how to put together the right mix, with the right words, with the right media. It’s already made a direct impact with my radio ads….The investment I am making in the E-Myth Program grows my business and my profits, and at the same time it’s getting me to a point where I can be free from my business…It has over exceeded my expectations!”
- Quality Water Services, Inc.