Calculating the Real Value of Your BusinessBy Dave Sobel | Posted 2011-11-29 Email Print
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There's a difference between knowing what your business is worth to you and what it might be worth to a potential buyer.
So many solution providers are focused on what their business is worth. For example, the recent IT Nation show had a number of sessions on "Mergers and Acquisitions." Service Leadership spends time helping business owners understand how much their business is worth.
But all of this activity doesn’t actually answer the core question: "How much will someone pay for it?"
Selling your business isn’t the problem – getting someone to buy it is the real problem. You may think your business is worth two million dollars, but unless you actually convince someone to give you that two million dollars, it’s all for nothing.
Think about it from the buyer's perspective. If I spend two million dollars, will I see a return on my investment in at least a two-years? This calculation implies that not only will I get my two million dollars back, but I’ll get more than two million dollars back. But getting back more than my two million dollars means taking that business I just purchased and finding ways to improve profits, reduce costs or both.
And don’t forget the investment of time and energy this requires. All of a sudden your business isn’t worth as much as you thought it was, is it? Just because you want that two million dollars doesn’t mean someone wants to give you two million dollars.
Take a good hard look at your business. Just because you’ve given it your blood and sweat doesn’t mean that directly translates into value. Your business is worth what someone can make money from in the future, not it’s past performance. Past performance only gives a guide of what is possible, but is no guarantee of anything to come.
As you think about the value of your business, you need understand what it’s limitations are. To increase the value, you need to remove those limitations. Consider these questions:
- Is your business heavily dependent on you, the business owner? If so, the value decreases, as you have to come along with the deal – and you could be the problem.
- Are you profitable now? Revenue is great, but profit is of interest, as profit is what goes into the buyer’s hands.
- How efficient are you? The less efficient you are, the more a buyer can increase efficiency to make more money, but also this poses a risk to the buyer, as they work to understand WHY you were so inefficient.
- How hard will it be to move the customers to the new entity?
- How much up-front costs will there be in the acquisition?
- How long will it take to get my money back?
Thinking about how to sell your business is a fantastic exercise, and everyone dreams of the big payout at the end. But make sure that the dream isn’t a pipe dream, but instead is a realistic assessment. You’ll be much happier in the end if you’re honest with yourself.