I ask because most business owners, at some point, envisage someone somewhere paying a fat sum to take off their hands the fruits of their labours.
They’re probably not putting enough away in a regular pension scheme, so the business itself is effectively their main pension plan (I know mine was).
For most people in this position, they only get one chance to maximise the return on their investment, yet mention the words exit strategy and you often get a very defensive reaction, bordering on denial. “I’m far too young to be thinking about that” or “I’m not planning to leave any time soon.” Well, maybe so, but if you don’t have any idea where you want the business to be when are ready to pull the curtain down, how do you know what steps to take to get it there? That’s why I try to get my clients to “start at the end” and envisage what the business might look like, “when it’s finished.”
If you’re a one-man-band or a lifestyle business (or both), by the way, and have no intention of ever becoming an employer, none of this applies. Your business is worth diddly squat, apart from a few bob for your customer list – maybe. Sorry.
Earnings multiples – the traditional short-hand method of business valuation – are subject to all sorts of variables, such as market sector, market sentiment, geography, competition etc etc.
In the boom years of the 90’s, some sectors were commanding 10 times – even 20/30 times in some instances – earnings. In the straitened noughties, you’ll be lucky to get 3/5 times.
Ultimately of course, a business is worth whatever someone is prepared to pay for it, and if you can get more than one interested party to the table and conduct a dutch auction, so much the better. Generally, however, the business owner’s view of the company’s worth is at considerable odds with the market’s assessment (assuming there is a market at all – take nothing for granted).
Recently I came across a tool which enables business owners to get an accurate and objective valuation of their business, based on all the variables and prevailing market conditions. (No guarantee that anyone will pay the bottom-line figure, of course). So far, so …well, so what?
But much more interesting is the linked study which analyses which specific aspects of the business of the business are depressing its value and which are enhancing it? In other words, the basis for an action plan that can double or even quadruple the business’s ultimate value. Its cost? Don’t be silly; if you’re serious about constructing an exit strategy, the relatively small amount involved is a tiny but vital investment with a huge potential return. I wish it had been around when I was running my marketing services agency. One area that will have a big impact on the price you’ll get is YOUR IMPORTANCE TO THE BUSINESS. Ask most owners how important they are to their own business on a scale of 1 to 10, and they’ll say 11 or 12.
And while much of that may be down to ego, the truth of the matter is that the higher the number they quote, the lower the value of the business as a trade sale. The less your business depends on you for its operational efficiency and profitability, the more it’s actually worth to an outsider. Up to 8 times more, apparently.
Think on that when you’re doing your sums.
How do you make the company less dependent on you? That’s my business!