A question I’m often asked is how much is my company worth? The sad answer usually is a lot less than you thought.
Here’s the spoiler. Your company is worth what someone would be willing to pay for it.
When we help owners put together a sale ready company the goal is to get the business to have a value that fill the owners financial needs, or at least what the business portion of those financial needs has to be. This week’s video is all about what the value of your company is and how you can move it up the value chain.
You know, a question we’re often asked is, “How much is my company worth? What’s the value of my company?” The answer usually is a lot less than you thought.
Now here’s the spoiler. Your company is worth what someone would be willing to pay for it. You know, when we help owners put together a sale-ready company, the goal is to get the business to have a value that will fill the owner’s financial needs or at least, what the business portion of those financial needs has to be.
You know, this week’s video is all about what the value of your company is and how you can move it up the value chain. So let’s jump right now.
- Now I know I’m repeating myself, but understand that your business is worth what someone else would wanna pay for it.
- Now the second thing I want you to realize is, there are several values your business lives in at the same time. Here are just a few.
- You have financial value. That’s what someone off the street would pay for your business, no strategic, no way of putting your business and making overhead go away. They’re just buying your business ’cause they like it and they think they can get a financial return.
- Number two is strategic value. Typically, a strategic buyer can afford and will pay you more money than a financial buyer because they’re gonna take your business, merge it into their business, and make your overhead disappear. So they can afford to pay you more.
- Number three is liquidation value. Now when I say liquidation value to most business owners, they put up their hands and say, “No, not me, I don’t wanna liquidate my business. I wanna sell my business.” Well, there are some businesses where liquidations are actually better than sales. You know, my sister when she sold her clothing store, she had a going out of business sale and she liquidated her inventory. She got more money doing that than she would’ve if she had found a buyer, if she could have found a buyer for her store.
- And then there’s the highest value of all, which is called intangible asset value. And that’s when you have intellectual property or intellectual capital that you have that a buyer wants to have ’cause they think they can leverage it and make huge value out of it.
- So when you ask me, “What’s my business worth?” the first thing I want you to do is tell me who your buyer is and I’ll tell you the value of your business. Because then I know what sort of multiple, what sort of multiplier they’re gonna use when they look at your business.
- So if you really wanna sell your business, if you really wanna sell your business, I mean you really wanna sell, you gotta put yourself in the buyer’s shoes. You gotta think like a buyer. So here’s what you need to do.
- First, you need to do a pro forma of how you would pay for your business at the price you want. So if you’re saying, “I want $3 million for my business,” and you work it out and say, “There’s no way my business today would be able to pay for me for $3 million,” you’re not gonna get $3 million for your business. You need to be realistic about what you’re gonna get for your business and how you’re gonna get paid.
- You know, when I sold my vending company, what I did was, it was a strategic sale. I knew what the buyers were gonna make go away from my overhead. Now a financial buyer coming in was gonna look at my business and take four or five, maybe six years to pay for it. But because it was a strategic buyer buying my business, they could afford to pay me the price I wanted, and they were gonna pay for it in 18 months. And because I had done the numbers, I could show them how they were gonna pay for it, and I ended up getting about $1 million more for the business as a result of that.
- Now, in your business itself, you need to understand your strong and your weak points. You wanna emphasize your strong points and you wanna manage the weak points.
- You have to be prepared to either fix or have an explanation of the weak points.
- Now most of the time, you’re not gonna get around to fixing your weak points, unless they’re glaring weak points. But if they’re not glaring weak points, you need to have an explanation of why they’re really not a problem. And a reason is, I want you to always expect you’re going to have a sophisticated buyer. You know, you hope for someone who’s not so sophisticated, but the truth is, if you’re prepared for a sophisticated buyer and you understand how sophisticated buyers go through the process, you’re gonna have a much better chance of getting a better price for your business than if you don’t.
- So here’s how to make your company really sale-ready. And whether you sell your business or not, you really need to do these four things.
- Number one, you have to make yourself operationally irrelevant. I’ve said this over and over and over again. The buyer is interested in your business, your people, your cash flow, and your systems, not you. So if you make yourself operationally irrelevant, it’s easier for some buyer to see how they could own your company.
- You wanna have a recurring revenue stream, and if you don’t have a natural recurring revenue stream through contracts, you wanna have a sales process that predictively produces sales. When you do that, a buyer can have more confidence they’re gonna get the revenue stream as you’re having.
- You wanna have a company that is values-led. Now I’ve talked about values a lot and why they’re so important. A buyer doesn’t care about your values, but what they do care about is the great value, the great company that your company-led values company has produced.
- And finally, you wanna systematize your company. They don’t wanna have, you’re not gonna find buyers who are interested in coming in and buying your business and trying to fix stuff and develop systems for you. They wanna buy the systems you develop and make your company work.
So I would like you to do something right now. I want you to click on the button below this video and DOWNLOAD our Free eBook on “Creating a Sale Ready Company.” You’ll learn the eight steps you need to take and you’ll realize that although it’s some time, it’s easier than you thought.
Now it’s gonna take you some time and it’s gonna be easier than you thought, and that’s what you want. So while you’re at it, leave a comment below and let me know what you think about your business value.
Hey, this is Josh Patrick. You’re at The Sustainable Business. Thanks a lot for stopping by. I hope to see you back here really soon.