Valuation

A Business is Worth is Exactly What a Purchaser Pays at Closing

I know what you’re thinking: “No kidding!” (this from our more gentle readers). Don’t get me wrong – there are certainly plenty of ways to reach a ball park figure – and I’ll elaborate on those methodologies momentarily – but the eventual sales price is impossible to predict with any precision.

The following are major factors to consider BEFORE undertaking more scientific forms of valuation:

Cult of Personality: How much of a company’s success is due to the leadership and skills of the owner? For example, how many clients and/or vendors have a favorable relationship with the company because they like the owner? How about employees? In a small company, personalities play a more significant role than in corporations – especially if there are only a few big accounts that contribute a preponderance of profits. Fortunately, it’s been my experience that these type of owners reciprocate the loyalty shown to them by clients, vendors, etc. and are usually very selective about potential buyers. Conscientious brokers will also recognize that it will take a special kind of buyer – it doesn’t behoove anyone in the long run to sell a business to someone who will fail.

All Airspeed – no Rudder: No matter how hard some owners may work – there are simply not enough hours in the day to compensate for mismanagement. I’ve seen advertisements from brokers stating that they only list ‘cash positive’ businesses. In reality, some of the very best buys are losing money – the owners are discouraged – having long since decided that either the business model is not workable or – in rare cases – that they’re not cut out to be in that business. The result is usually a low price – even lower than the fair market value of the assets. Frequently, they believe that their only option is to auction off the assets. Keep your eyes peeled for this kind of listing – if you trust yourself to identify the fatal flaw(s) that led this owner down the wrong path – it’s one heck of a bargain.

Customers Won’t Beat a Path To Your Doors if They Don’t Know You’ve Built the Best Mouse Trap. Many owners actually manage their company well in every respect except marketing. Contrary to what we’ve always been told – even if he’s the best at what he does, works 80 hours a week, and helps little old ladies cross the street – he can still be an utter, albeit noble failure. In many cases, he’s spent a ton of money making sure that the business sparkles on the inside and out – prepared for anything – except the deafening silence of no customers.

You’ve heard all the stories about how small businesses fail for lack of cash. This is certainly true and there are plenty of studies to prove it. Let’s drill down a bit, though – cash for what? It’s my pet theory – mainly because I’ve seen it so often – that initially, everyone is reluctant to invest in marketing. It all seems so expensive and so – well, ethereal – I mean, who knows if anything’s going to work?

Unfortunately, instead of researching the subject, most small business owners mentally throw their hands up in the air and hope that good service and product will save the day. By the time the owner becomes desperate enough to venture out into the marketing world, it’s too late. At this point, cash flow to pay operating costs is not adequate and the end is imminent.

SO – when the business finally fails – the apparent reason is lack of operating funds when, in reality, the lack of sales due to very little or no marketing was the catalyst for this disaster. The cause is camouflaged by the result.

When you run into a business for sale that appears to be well managed but struggling – bear this tendency in mind. In fact, if the owner is already painfully aware of his misstep, you might want to consider a partnership – after all, he’s already doing a great job in management and creating a great product.

Peter Principled or Owner is Pushing the Personal Envelope:
Frequently, owners recognize that they are not equipped to take a company to the next level or simply aren’t ready to make the commitment. There’s a huge difference between an owner-operator and an owner-CEO – each requiring distinctly different skill sets. If you think about it – how many famous entrepreneurs are still CEO’s of the company they started?

A few obvious comparisons: a CEO must be able to attract and retain qualified employees; delegate authority; create and communicate policies & procedures; and most importantly, to lead the company with a vision. The owner-operator, on the other hand, enjoys greater freedom but must rely upon himself to execute a vision. With rare exceptions, everything related to the business is in his head – exactly where he wants it.

Ironically, even though the owner-operator often performs all tasks – including the proverbial “taking out the trash”, the CEO usually has less time to devote to family and other activities.

SO – before taking the reins of a company – you need to decide if you want to be an owner-operator or a CEO. That is, do you plan to continue along the current path or do you want to expand? The value of the company to you may differ significantly depending upon the answer.

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