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Calculating the Real Value of Your Business

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 […]

Written By

Dave Sobel

Nov 29, 2011

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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.

Buyers will be looking at these obstacles to achieving profit
with a purchase:

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.

Calculating the Real Value of Your Business

Dave Sobel

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