Tag Archives: business value

Your Company’s Worth

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Do You know How Much Your Company is Worth?

 

We usually keep tab of money in the bank, how much our stocks, bonds, and other investments are worth and how much our home and real estate investments are worth. And we know how much debt we are in – either from a mortgage, student loans, car loans or other loans. We use these numbers to calculate our net worth, and it helps us build a nest egg for retirement. However, strangely, many entrepreneurs have no idea of how much their business might be worth. Your business could be one of the biggest assets that you may have. It is an investment of time, labor, and your financial investments. Shouldn’t you know the value of your business and try to protect and grow its value just like your other assets?

You can hire a valuation expert or an M&A advisor/business broker to get some idea about the value of your business, or you can run some back of the envelope type of calculations to get a rough idea based on your financial performance. Very often, for small businesses with gross revenues under $5 million, you will see that the value is often 2-3 times discretionary earnings (DE, also known as seller’s discretionary cash flow) or 2.5-4 times adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). In many industries rules of thumb also calculate valuation based on a multiple of gross revenue (e.g. dentist practice is often said to be worth between 0.5-0.7 times revenue). However, for me,  cash flow, either as DE or EBITDA is a better measure because a substantial revenue without profits does not do much.

Couple for valuation

Couple for valuation

If you are like entrepreneurs shown in this cartoon, who can go on a world cruise for a year, then I would say that you have probably done well – both from profiting from your business and running the business. You have put your business on auto-pilot so that you have a management team who can run the business with minimum involvement from you. As a business owner, you want to take yourself out of a situation where the business cannot run without you. As we teach in our Value Builder advisory practice, this is one of the eight key drivers for driving the value of your business (see here for the other seven).

 

As 2017 is just around the corner, I hope you too will more attention to your business and see how you can grow your investment in it by taking small steps to build value. Our Value Builder score is a quick way to know in 13 minutes of where you are in terms of improving your valuation.

From all of us at TechnologyPark.com, cheers for the new year!

Yatin Thakore

 

Don’t be a Juggler!

juggler_juggling_balls

A common occurrence in many small businesses is that the owner makes all of the important decisions. After starting and building the business, owners are afraid to relinquish control. They do not feel that the others are capable of running the business like they can. So you are constantly juggling various tasks and making every decision.

This is what we describe in the Value Builder System as “Hub and Spoke” system. You as the owner are the Hub and everyone else is the spoke. This can also happen if you are not the owner but a manager where you are making all the decisions.

But what happens when you, the Hub, are away? Things don’t get done. And as a result you have a hard time to get away from work. You may not have taken a vacation in years.

Not only this is stressful to you, it is also very inefficient and demoralizing for your employees (or those who work under you). And more importantly, this will drag your value down value. Research by the Value-Builder team has shown that businesses following the Hub-and-Spoke model, where owners are in control of most of the decisions, sell on an average of 2.92 times their pre-tax profit. However, the businesses where the owner is not significantly involved in day to day operation and has management team and employees empowered to make decisions and running day-to day operations, sell on an average of 4.54 times the  pre-tax profit.

By making your business much less dependent on you, you can increase the value of your business by 55%! Not only that, you will have happier employees and less stress for you. You can now afford to take vacation.

But how do you do this? To start with, create operating manuals for your company. Write detailed procedures for everything that needs to be done. For each job function, you have a system or operating manual describing what needs to be done. Once you have these ready, train your employees to follow the processes and systems and give them the right tools. To quote Michael Gerber in E-Myth Revisited: “Organize around business functions, not people. Build systems within each business function. Let systems run the business and people run the systems. People come and go but the systems remain constant“. How does McDonald’s delivers the same burgers and same experience across thousands of outlets – they have the system and procedures nailed down.

Making yourself as a business owner (or manager) less important and having a system in place is just one of the eight value drivers that improves the overall valuation of your company. If you are curious about what is your score on this ValueBuilder scale, take this 13 minute survey.

So long for now.

Yatin

 

 

 

 

Getting Your Business Ready to Sell

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sold_jan7_2016_pond5bought

Whereas most of you might have had experience selling your home, you may not have had an experience in selling a business.

Whether you are selling a home or your business, your goals are the same: Sell it quickly and get the best price. To do this, in the case of your home, typically you want to clean up the home, remove all clutter, fix up things that are broken, and stage it to look attractive.

In some ways, selling a business involves similar things – fix areas that may need fixing, keep clean books and easy to understand financials, and make sure that the business runs smoothly and your place of business looks attractive and presentable.

But in contrast to selling a home,  making a business sellable and being able to get top dollars, often can take a year or several years of preparation. The best strategy is to run the business so that it can  be easily sold even if you are not planning to sell it. This will only make your business stronger and more profitable, easier to run,  and if it becomes necessary for you to sell your business, you are prepared.

So what makes your business attractive to buyers? What we see from our experience is that the buyers are in general looking for following qualities:

  1. Healthy Business.  Most of the buyers are looking for a business that is healthy, making money, and can provide for good income for them. Exceptions are start-up businesses which have good potential for a strategic buyer, or someone who loves a challenge of turning a business around and is looking to buy such a business for cheap. (Somewhat similar to home buyers who are looking for move-in ready homes versus fixer-uppers). Most of the time, we find that it is very hard to find buyers who want to buy a business making little or no money. The value of the business also improves significantly if it generates healthy profits.
  2. Business is on Auto-Pilot. Which means that there is an excellent management team in place, with good processes and standard operating procedures. It requires very little input of the owner in day to day running of the business. This also increases the value of the business significantly because the buyer does not have to bring in expensive management team.
  3. “Sticky” Customers. Customers are heart and soul of the business and nothing pleases a buyer more than to see that these customers are ‘sticky’ and ideally are  tied to the business via long-term contracts, providing consistent revenues every year.  Getting new customers is not easy – one of the main reason people buy a business rather than starting from scratch. Sticky customers will improve the value of your business.
  4. Diversified Customer Base. Buying a business where a high percentage of business is dependent on a few customers is risky for the buyer. If that customer leaves, the business will suffer. Ideally, no single customer should be responsible for more than 5-10% of the revenue, unless that customer does have a long-term contract.
  5. Happy and Competent Employees and Management Team. If the employees have a high morale and management team is doing a great job, the transition to the new owner becomes seamless.
  6. No Legal Issues.  No one wants this headache.
  7. Clean Financials. Buyers don’t like “fuzzy” financials and mingling of personal and business expenses. Keep your books clean. Whereas some personal finances are easier to explain (e.g. certain management perks such as car allowances, Life insurance payments), others cannot be and you will unnecessarily create distrust for the buyer. You maybe save some on taxes, but lose out on the value and attractiveness of your company.
  8. Keep it Lean and Trim. Always try and curtail unnecessary or extravagant expenses and keep your margins high. This does not mean paying too little to your employees or not giving them good benefits (these are short term savings that does not help you long-term), but it does mean investing in tools and processes that help you run your business efficiently, improving productivity, focusing on the profitable segments of your business and cutting down on frivolous expenses.
  9. Stand-out from your Competition. Buyers would love a business that is somewhat different. This could be due to some unique technology or product, could be from particular branding, or could be from niche business focus. A stand-out business would attract strategic buyers and almost certainly bring you good value.
  10. Business Reputation. Finally, does your business enjoy a good reputaion in the marketplace? Are your customers happy or fanatic about your service? Are employees talking good things about your company? Is there any regulatory or legal trouble? Buyers would love such businesses.

Knowing what most buyers are looking for will help you make your company more attractive to buyers and also will help you get top dollar for your business.

You can also read an excellent book by John Warrillow, called Built To Sell. He also runs very interesting podcasts on the subject. Another great book, that emphasizes “Work on your business and not in your business”, called E-Myth Revisited by Michael Gerber is also a classic, that is a great read, and will help you run the business smoother and in turn make is more sellable.

Coming up  next … How much is my business worth?

So Long Friends,

Yatin