7 Reasons Your Business Isn't Worth What You Think It's Worth
Business owner sometimes have lofty expectations on the value of their companies. Here are reasons why these expectations might not be achievable.
Think you know how much you could get for your business if you sold it? Think again. In my experience, business owners often get slapped with business valuations that are much lower than they think they deserve. In a worst-case scenario, the following 7 reasons could even cause your business to be worthless simply because it can’t be sold at all.
1. You’re too involved. You have your finger in every aspect of the business. Customer relationships, equipment purchases, financial statement preparation, hiring, ordering office supplies, etc. etc. etc.
How to Boost Your Business’s Value: Build systems, trust your employees and let some of the less important stuff go.
2. No sales processes. Your company doesn't have a defined process for acquiring new customers or retaining existing ones. Your success in sales is probably tied to your (or your sales teams’) charisma and charm.
How to Boost Your Business’s Value: Bring a little more formality to how you chase, win and keep your clients.
3. Poor return on equity or assets. You either have too many asset generating not enough profit or profits levels that can’t justify your value expectations.
How to Boost Your Business’s Value: In the former situation, you can try to maintain the same level of profits while you sell off redundant assets and pocket the additional proceeds. In the latter, you can try to increase your earnings to demonstrate a higher return for a potential buyer.
4. You can’t adequately explain goodwill. Try this exercise. Take the value that you think your business is worth and subtract all tangible assets that a buyer would need to run your business. This will include capital assets and a reasonable amount ofworking capital. The difference is goodwill.
How to Boost Your Business’s Value: Is goodwill as a percentage of your value expectation greater than 50%? If so, you’d better start explaining in detail what makes up that value. If you can’t, it would be best to reset your value expectations.
5. You lack a defined roadmap for growth. You see lots of opportunity in your industry but you don’t have a solid plan on how to capitalize. Without a documented plan, a buyer can’t discern whether your past success was due to quality business operations or just dumb luck. Either way, a buyer won’t be willing to pay you a premium if they are developing the plan to capture that growth.
How to Boost Your Business’s Value: Make a plan!
6. Lots of hair. “Hair" on a deal is often used to describe a business that has some negative issues that could impact its sale. Outstanding litigation, poor financial records, shareholder disputes, and customer concentration are a few situations that can cause potential buyers to run the other way.
How to Boost Your Business’s Value: Identify the potential hair and deal with it well before an exit.
7. Lack of Predictability. This is due to a combination of No.2 and No.5, among other things. Lack of predictability equals more risk. More risk equals a lower purchase price. The fact that your business is unpredictable may not faze you because you are “in” your business every day. That’s not the case for a potential buyer.
How to Boost Your Business’s Value: Ease their fears by providing proof (i.e. budgets and forecasts) that shows you can predict how you’re your business will perform.
Written by John Carvalho | President, Divestopedia Inc.
John is president and founder of Stone Oak Capital Inc., an M&A advisory firm, as well as a co-founder of Divestopedia. For more than 20 years, John has served his clients on numerous valuation, acquisition and divestiture assignments in a wide variety of industries. John holds the Corporate Finance designation, is a Chartered Business Valuator and a Chartered Accountant. He has made it his life's mission to help entrepreneurs build valuable businesses and Divestopedia serves as an avenue for this cause.