The Business Owners’ Special Series (B.O.S.S.) No. 39
Too often, business owners do not give sufficient time and attention to understanding their business’s value. The unfortunate result is that when they go to sell their business and begin to receive offers, the offers fall far short of the owners’ expectations.
Not only is the business worth less than the owners expected, but it is worth far less than it could have been worth. This is the “value gap” — the difference between what a business is actually worth and its true potential value.
Why does the value gap exist?
For many business owners, the business falls far short of its potential value for one simple reason: the owners do not spend sufficient time and attention understanding their business’s value, and therefore, they fail to take the necessary steps to improve value.
Why is it important to close the value gap?
If you don’t sell your business at its full potential value, you are giving the buyer a great deal. In essence, you’re selling your business at a discount so the buyer can develop the business to its full potential value. In other words, you may have left several million dollars on the table when you sold your business.
Think about this:
The prospects for your post-sale retirement, goals and lifestyle would be far better if you did not sell your business for a discount. You would have greater financial resources in retirement if you had only spent time educating yourself on business valuation, and then used that knowledge to develop your value acceleration strategy.
Isn’t several million dollars (or more) in additional sales proceeds sufficient motivation to focus on business value long before you sell your business?
If a larger pot of gold is waiting for owners who focus on business value, why do so many fail to do so?
Business owners are often more focused on short-term priorities – reducing income taxes, running day-to-operations, dealing with employee issues, handling customer complaints, or pursuing new business and other daily urgent matters. Each is a bona fide business concern that needs proper attention. However, they do not always need the owner’s attention. Many day-to-day business matters can be managed by employees. In fact, too much owner dependence is one of the main factors that drives down business value.
Owners must put business value at the center of their attention if they want their business to achieve its highest potential value.
What makes focusing on business value so elusive for many business owners?
- Business owners cannot find that number: “Business value” cannot be found anywhere in the business’s financial statements. It is nowhere in the accounting records, and it’s not produced by accounting systems.
- Business owners may not want to spend the money on a formal business valuation: This is short-sighted. Owners should have a formal business valuation conducted at least once every few years. You cannot plan for a successful exit or have a value acceleration strategy if you don’t know the current value of your business.
- Business owners do not always educate themselves on types of buyers: Not all types of buyers will pay the same price, making the concept of value more difficult to ascertain. Each type of buyer has their own idea of value. For example, a strategic buyer that can increase sales volume of your product by a thousand-fold may be willing to pay more than a buyer with a similarly sized business motivated to eliminate a competitor.
- Similar businesses do not have similar value: Two businesses in the same industry with the same products, sales volume or profit margin may still have vastly different values. This is because once you get past the numbers, one company may have better business operations, more streamlined systems and processes, and stronger infrastructure. The business with stronger infrastructure will sell for a higher price.
- What exactly is the buyer buying? If the buyer is extremely impressed with the way your business runs, they will pay a higher price for a turnkey operation. If your systems and processes are inferior, your management team is weak, or there is too much owner dependence, then the buyer may only want to buy your customers. The buyer will pay less to only acquire customers than it will to buy an entire high-performing business.
Here is your action plan:
You can do this. You can bring your business to its highest potential value, but it takes time and highly focused attention.
- Have a formal business valuation so that you have a benchmark to build from.
- Make certain your business valuation provider gives you sufficient information about recent transactions in your industry. Understand the price difference for best-in-class companies versus merely average companies and poor performers. Discern the range of prices for businesses of your size and where your business value now sits within that range of values.
- Educate yourself on the different types of buyers and the pros and cons of selling to each type of buyer. Then, decide which type of buyer is the best fit for your plans.
- Pinpoint where the business is overly dependent on you, the owner. Next, develop a plan to delegate and train your key employees to replace you.
- Identify areas in your business where buyers will find risks or weaknesses. List action steps to fix what is “broken” from a buyer’s perspective.
- Find ways to increase sales, efficiency and profitability. Your employees may be the best source of ideas — and they are waiting for you to ask.
- Ensure that your professional advisors understand how to build value. Ask them for their ideas about growing value. If you feel their responses are weak, it could be that you need to add a value advisor to your team.
Remember, closing the value gap and reaching the highest potential value is a long-term play. Your post-exit lifestyle depends on selling your business for its highest potential value. Procrastination is the biggest value killer. Do not delay. Get started today!