What if you wanted to sell your business tomorrow?
Business owners, generally speaking, are focused on the results they create. Most business owners I have met (and I’ve met a lot!) focus on many other things as well, but at some level we all recognise that results are important. Cash and profit this week, this month, this quarter and this year. The numbers, after all, tell the story of any business.
There seems to be a lot less focus, however, on creating value. A business is an asset; like any asset it can increase or decrease in value. A question I often ask is ‘so what are you doing to increase the value of your business?’
What is Value?
As we all know, any asset is worth what someone else will pay for it. In businesses, this is normally represented as a ‘multiple of earnings’. In the UK, many small businesses that are offered for sale never get sold. (A recent estimate in the US shows that only 20-30% of businesses offered for sale actually sell – see Forbes article below).
So, many businesses don’t sell, even though the owner may have invested money in trying to sell. Of those that do, the average multiple achieved is 3 to 3.5. (Of course the devil is in the detail here and there will always be discussion about what we count as ‘earnings’ and what is the value of other assets in the business). We’ll use 3 to 3.5 times earnings as a guide.
Can we improve the value?
Of course, to increase the value there are a few things we can do:
- Increase the earnings
- Increase the multiple that the business deserves
- Do both!
Let’s focus on the multiple
For obvious reasons business owners are often focussed on improving the earnings – the dividend depends on it! So let’s focus on the multiple; lots of things will affect this of course, like the industry you are in and how many buyers you can connect with.
For many business owners a significant chunk of their wealth is tied up in their business, and yet it’s not so common that I see a plan that’s really focussed on increasing the asset value. I suspect this is because it’s not easy to relate specifics in the business to the asset value, other than specific financial metrics.
Here are the key points:
– there are a number of other specific drivers of asset value
– these can be assessed, scored and improved with focussed action
– Businesses that score highly against these metrics achieve double the multiple (ie 6 times earnings rather than 3 times) when they are sold.
Just think about that what that means for your business for a moment. I’m sure you can do the maths. If you would like to complete the Value Builder questionnaire and get a report for your business click here .
What are the critical drivers?
Including financial results there are 8 critical drivers, things like the level of dependence on the owner, dependence on key staff, suppliers and customers. How robust is the marketing, the sales process, how likely is it that the customer base will stay with the business? All these things represent risk, and risk drives value down.
So the job for a business owner who wants to optimise the value of their business is to measure, manage and improve the business against these metrics.
If you’d like to know more, please contact me immediately on 01672 512001 or drop me an email at nigelscott@actioncoach.com.
We can arrange for a free initial assessment of your Value Builder score, and we can help you plan and execute improvement in the value of your precious Business Asset.
