Do you know the true value of your business? Business valuation isn’t as easy as assigning a multiple, and finding a buyer isn’t as easy as placing an ad.
Selling your business isn’t easy. If I had to take a guess, I’d be willing to bet that 90% of all business owners have never sold a business before; and most, if not all, of them have more than 80% of their net worth tied-up in their own businesses. When you think about it, it’s scary.
More than thirty-five years ago, I launched a weekly publication with little more than a typewriter – ask your father – and a bottle of ‘white-out’. With a combination of luck and a lot of hard work, I was able to sell it six years later to a buyer who had just left his position with a local daily paper.
I was lucky. There was a industry-savvy buyer with money, locally, just as I was ready to sell. This rarely happens, of course, but I also had done a few things right along the way that made the business worth buying… it had value.
How do you know the true value of your business? The only time you’ll know for sure is AFTER the sale, because the true value is only what a buyer is willing to pay. Reality: The ‘asking price’ is meaningless.
But, before you spend between $5,000 and $25,000 or more on a certified valuation, you may want to just go through this checklist:
- Can your business operate without you? If not, you don’t own a business, you own your job. A true business keeps operating, and making money, even if you’re sick or on an extended vacation. To have value, the business shouldn’t need you. Early in my publishing career, I had read Robert Townshend’s Up the Organization; That’s when I knew how important this was.
- Do you have documented operating systems in place? If you’re away (see #1) and a team member leaves, can your business continue functioning with a replacement? Do you have a “how to” manual for each business function? I was lucky I had worked for a company that had a great manual, and I had worked on the rewrite; so, I duplicated those efforts in my own business.
- Are your revenue sources diversified? You don’t want a huge chunk of your revenue coming from a single customer; if they leave your business may cease to exist! Our publications focused on the ‘bread & butter’ advertisers, which turned out to be a winning idea.
- Does your business have a recurring revenue stream? Does this recurring revenue account for 10% of revenue or 95%? That makes a difference. Subscriptions are better than re-orders. Is the recurring revenue tied to a personal relationship or something less dependent (see #1)? A buyer will expect those revenues to continue. In our case, a large number of “bread & butter” advertisers and a few big names that comprised less than 10% of total revenue were ALL under long-term contracts. We had NO one-time ads. Our buyer couldn’t believe it! What’s more, we had zero delinquency and no collection problems.
- Do you have a solid management team? The keys here are stability and spirit. A serious buyer will see good management as an asset. An owner who has a non-qualified deferred compensation program in place will likely have motivated team members who will want to continue working so that their accounts will vest every year. My publications didn’t have a deferred comp plan, largely because I knew nothing about them at the time and no one ever approached me about it. If I had known, you can bet I would have put one in place.
- Are your financials clear and easy to understand? Typically, many small business owners try to “run everything through the business” to grab every possible deduction they can find. Can a plumber really deduct a cruise because he mentioned “clogged drains” to another passenger? When an owner runs a lot of personal expenses through the business, it sends the wrong signal, even if they can be ‘backed-out’ for the buyer. If the business is really “clean”, you shouldn’t have to “clean-up” the financials. While I could deduct more than many other businesses, since we could publish restaurant reviews and travel sections, etc., I made sure to keep the expenses legitimate and the books clean. This impressed our buyer – and his advisors. Nothing had to be “backed out”.
- What is your cash-flow trajectory? Cash flow is what’s left after everything and everyone has been paid. Is your cash flow improving or declining? What are the causes? This was something we measured constantly. While we were growing, I could see the growth was beginning to show signs of weariness after six years. When we sold in 1984, it turned out to be a good time as other competiing media were beginning to take hold. Tracking this trajectory is what gave us the ‘heads-up’ that changes were in the wind.
Seven tips seems to be a good number; no one ever seems to make a list of eight; but, if I were to add one more, it would be this:
Own your distribution. If you have solid, long-term contracts in place or have vertically integrated this function, your business has far greater value than the business that’s dependent upon, or at the mercy of, some outside entity. Obviously, if you’re in retail, this translates into location considerations. This is why many publications use the U.S. Mail, contracted delivery, or their own carriers. Those publications have greater value than the ones dependent on the courtesy of a local store to allow their presence.
Here’s something you may not know: Many, if not most, businesses never do find an outside buyer.. The truth is cash buyers are not only hard to find, they seldom exist, at least in the small business landscape. The idea that someone will write a check for the selling price is largely a fairy tale. Outside buyers, when they can even be found, will often purchase on a myriad of terms.
It should be no surprise that business transfers most often occur involving the owner’s family members and/or employees; but, a sale to family members or employees doesn’t just happen overnight. The business owner who sees his/her business as ultimately an equity that can be traded for a secure future, will be planning the move years – even ten – in advance, and usually with a team of competent financial, legal, and tax advice. Those who think they’ll have no problem finding a buyer just may be in for a sad surprise.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.
