Do You Know Your Business’ Value & Why It Isn’t Higher?
It’s no surprise that your business’ structure, processes, and market presence impact its monetary value as an asset. From a 10-person operation to an international powerhouse, your owner-level choices have back-end financial implications. For all businesses, it’s advantageous to think of the business itself as an asset with a dollar value, not just as a passthrough vehicle for monthly and annual profit. Similar to a home or a car, the more strategic time and care you put into it, the higher its value will be when you want to consider selling it.
Whether you’re trying to sell your business or pass it on to the next generation, this “investment mindset” can lead to profound improvements. Many company owners are so involved in the day-to-day operations, it’s hard for them to think beyond the workweek grind and take the time to work on the business. However, an investment of X value of time and money now can easily lead to 3X-4X value at the time of the sale or transfer. But, for business owners to realize this extended value when they want to sell or transfer ownership to the next generation – it requires some work and patience.
One note for owners who intend to pass the business to the next generation as opposed to selling it in the open market: 70% of all businesses fail in the passing to the next generation. Only 3% survive to the third generation. The biggest reason for this is that a lot of concern is put into the readiness of the successor and not nearly enough concern is put into the readiness of the business itself. The business should be prepared in such a way that it is easier to run day-to-day. As an owner do not consider your successor having to fix all the current problems as an offset for not getting paid market rate for the business. If you haven’t been up to the task, why put that burden on them? All of the tasks involved in making the business easier to run (documenting processes, cleaning up the balance sheet, firing bad actors, building the management team, etc.) are the same actions required to prepare a business to sell. It is a huge mistake to pass the torch to your successor, expecting them to be a superhero and let all the problems in the business now be theirs.
Like all investments, you need to start by looking at what you currently have. Click the button at the end of this blog and take the Sellability Score survey. You will get an estimated current value of your business and an analysis of specific methods for improving its value. Is your balance sheet clean? Do you audit your financials annually? Do you have a competent management team in place? Is a majority of your revenue recurring? These kinds of issues are the first things potential buyers will inspect, and any problematic issues will quickly lead to a lower estimated value.
If your business is not structured like an investment, the likelihood of receiving a fair value for it is slim. Similar to a house with no landscaping or a car with a massive dent, the issues will be noticed and the price will be adjusted accordingly.
Get Your Sellability Score: If you’re interested in selling your business or passing it on, reach out to our team to get the tools you need to improve your company’s value. Schedule a call today!