What's Your Business Worth? Really.
There is a sad reality out there for most business owners and it goes like this…A business owner spends their life building, creating and bringing something special to the marketplace. They start with nothing, but end with something. And often that something, no matter how big in stature or revenue is expected to contribute significantly to long-term savings and ultimately retirement. As that time approaches, they starting asking questions like “who will buy my business?” and “what’s my business worth?”. They ask around, find a value that sounds right to them and bank on it…literally, they BANK on it. Then reality sets in. They head to the open markets and no one bites. And of the businesses who are lucky enough to get a few nibbles on their line, the offered price is wildly different than expectations. Now what?
You may have been in this situation. You may be in it today or know of someone who is. So what do you do? What’s the answer when the money you needed and expected for retirement vastly differs from what you’ve been offered? How do you handle that gap? Well, lets take a step back for a second and understand how all businesses are valued by potential buyers.
Future Cashflow
When a potential buyer is evaluating your business as an acquisition target they are most often looking at one metric over all the others. That metric is future cashflow. What the buyer wants to know is “how much will this business produce in cash over the next number of years?” They do this most often by looking at Discounted Cashflow. Whether your buyer is a Private Equity firm or simply an individual buyer looking to essentially buy themselves a job, future cashflow is a critical metric. The value of your company is a direct relationship between the future cashflow your business may generate and the risks that would keep it from doing so. Why is this point so important? Typically the immediate reaction from most business owners when they hear their business isn’t worth as much as they feel it should be is to “increase sales” or “cut costs”. While those may be options, they may actually do more damage to your business if the underlying processes in place can’t support such a move.
So if cutting costs or increasing sales doesn’t automatically make your business more valuable (and by default you wealthier) what can you do? The trust is that there are some very definable and qualitative metrics you can move the needle on that will absolutely increase the value of your business. Things like creating owner independence i.e. you are not the business and it can easily survive without you means your business is more valuable. Why? Because when you leave there isn’t a significant risk to future cash generation. Do you have a story for growth that is believable, tangible and provable? If so, your business will be worth more. Does your business demonstrate scalability? Simply put, the more you sell and the more you grow do you get more profitable or not? Areas like these are business fundamentals that when executed properly can drastically drive up the valuation of your business because they drastically drive down the risk to future cashflow.
A quick note on “Strategic Buyers”
Everyone has heard of a strategic buyer. These are buyers who look at your business and see some type of synergy that can be created through the acquisition of your company. Strategic buyers are great because they often care less about future cashflow and more about individual pieces of your business like intellectual property, your customer base or other assets they find particular value in. Because of this, they often offer a higher valuation than a “normal” acquirer might.
However, do not place your retirement bet on finding a strategic buyer. While there are some things you can do with proper planning ands strategy to increase the odds of finding a strategic buyer that we will discuss in future blogs, the timing, market and dollar values all have to align perfectly. Don’t gamble your future on selling to a strategic.