February 2008: Know the Worth of Your Business or It May Be Worthless
Know the Worth of Your Business or it May Be Worthless Can you handle the truth? Of course you can, if you really want to sell your business! By Laura Maver Ward
I’m still amazed at how many business owners do not understand the importance of knowing the “realistic” value of their business before they decide to sell their company. In this month’s breakthrough business strategy, my goal is to help you understand how going to market with a realistic price and realistic expectations is essential to your transition success. Recently, my partner and I met with a business owner who is having health issues and is in a situation where he needs to sell soon. Before contacting us, this seller tried to sell his business through a trusted advisor and didn’t find any takers. Why? The seller was asking too much. Unfortunately, we see this scenario all too often. In this case, the trusted advisor became so frustrated with the situation that he recommended the seller contact us to help him. Before doing so, the seller hired a third party valuation company to value his company. “Great,” we thought. “Finally, a business owner who understands the importance of getting a valuation before going to market.” You Want the Truth? You Can’t Handle the Truth! Unfortunately, this business owner couldn’t handle the truth; his business wasn’t worth as much as he needed it to be worth. As it turned out, he coerced the valuation company to come up with a valuation that was closer to his expectation. The valuation analyst (not one we recommend) concocted a ridiculous formula to project revenues for the year. He eliminated several months of weak earnings and projected revenues using inflated revenue figures. Like a peacock with fluffed up feathers, the business owner proudly presented the valuation to us. He wanted us to take his company to market using a figure that was even higher than the inflated valuation figure. Thanks, but no thanks! Who is this business owner trying to fool? He may fool another broker who is hungry for listings, or an inexperienced and naïve buyer, but he definitely won’t fool a lender—especially after the recent mortgage debacle.
Lenders Will Find the Truth A great article entitled “Borrowing Money” was printed in last month’s issue of the Kansas City Small Business Monthly. I recommend you review that article, as it will give you some great insights and tips about borrowing money. Here’s the bottom line: Lenders are adverse to risk. Underwriters are responsible for determining the value of a business based on the ability of that business to generate enough profits to repay the loan. Therefore, they analyze only historical data, not projections. Projections can’t be proven and, therefore, represent risk to the lender. Also included in the analysis of the underwriter is the ability of the buyer to repay the loan, in the form of collateral, if the business goes south. Every prospective buyer who delivers a letter of intent goes through a thorough examination, and no two buyers are alike. Simply said, lenders will not grant a loan for a business if the all of the numbers don’t compute. If there’s a Small Business Administration loan guarantee involved, you can count on extremely close scrutiny—no ifs, ands or buts about it. I continually hear horror stories from lenders who turn down loans because a business broker has either valued the company too high or didn’t value the company at all and listed the business for a “pie-in-the-sky” amount that the business owner or, worse, the valuation company invented. This practice really makes me want to get on the phone and ask the broker: “What were you thinking?” It’s a disservice to everyone involved. No wonder 87 percent of small businesses on the market on any given day will never sell. As a seller, what can you do to protect yourself from this happening to you?
Determine Your Exit Goals Whether you are selling your company this year or 10 years from now, the best time to plan your exit is today. Not tomorrow. Today! Begin by determining how much you need to net, after taxes, from the sale of your business in order to leave your business in the style you want and deserve. Be sure to work with an advisor who fully understands transactions and can help you determine your tax liability—before you go to market.
Get a Valuation of Your Business Today All too often sellers wake up one day and say: “Enough is enough!” They are burned out or they are having health issues. For those reasons, and others, business owners should always know the value of their business. Hire an experienced and unbiased valuation analyst to conduct a third-party valuation. Let him or her do a proper job, without coercion. Leave your emotional baggage behind, be realistic and accept the valuation for what it is—a snapshot in time. Many business owners think that their blood, sweat and tears increase the value of the company. They are mistaken. Other business owners think that a buyer should pay them the money they invested in the business, no matter what the business is generating in income and profits. With all due respect, it doesn’t work that way. As a business owner, you must separate your emotions from the valuation process. Buyers really don’t care about your journey. They don’t care how much money you’ve invested. All they care about is how much cash flow will be available after debt service. They are looking for the same thing you are—to have enough money to be able to live in the style they want and deserve. Sellers must be willing to be objective. They must be willing to put themselves in the shoes of a savvy buyer; one who makes practical business decisions. Do that and then ask yourself: “How much is my business worth?” Determine the Gaps What is bringing the value of your business down and, more importantly, what will increase the value of your business? Although the following list is not all-inclusive, these are some of the categories you should focus on to increase the value of your company.
Financial Strength—Buyers want to buy a company that is growing and profitable. The buyer has to have adequate cash flow after debt service and capital expenditures. The cash flow has to cover all of the buyer’s personal expenses. The lender will focus their analysis here and dictate the real value of the business.
Owner Importance—Do you—as the owner— own the customer relationships? If so, you need to transfer those relationships to someone else in the company before you sell.
Labor—There are many factors to review as far as labor is concerned. Buyers will want key employees to stay, but sellers can’t expect the buyer to guarantee job security. How difficult is it to find qualified employees? What’s the benefits package and are employees due any significant salary increases?
Diversity and Stability of Customers—How many active customers are there? Will they stay with the new owner? What’s the customer concentration? What will happen if the company loses one or two key accounts? How long have the customers been purchasing from your company? Are you providing products or services to customers that are not profitable?
Vendors—Are there any exclusive relationships? Will they stay with the new owner? Are there contracts in place? Are they transferable?
Repeatable Systems and Processes—The efficiency of your business has a great influence on profitability. The more profitable you are the more money you will collect at the closing table.
Competition—How strong is your competition? Are technological changes going to give a major competitor with more cash a significant advantage?
Facilities and Location—Will the buyer lease or buy the building? What’s the length of the lease? Is it transferable? Are there any changes in the area that will affect the location (negatively or positively)?
Future Outlook—Does the business have the potential to grow in the future?
Develop an Action Plan Prioritize the categories you have identified in the last step and develop a detailed action plan to improve your business. Be sure to include deadlines. Consider the rewards you will reap when you sell your business for the amount of money you need or want. Are there obstacles that will get in your way? Write them down and develop solutions and action steps to knock them down, one by one. Review and adjust your plan regularly.
Take Action With your action plan in hand, you must take action. This is the only way you will be able to achieve the goals you established in step one. If you are like most business owners, your business is probably your most valuable asset. Treat it as such. Follow these steps to increase the value of your business so you can leave it in the style you want and desire, when you want. If one day you wake up and have to sell the business, then you’ll be more prepared to get what you need and want. Whenever you decide to sell, always remember that your expectations need to be in line with the amount of money a buyer is able to finance. It’s the bottom line. It’s non-negotiable. It’s the truth. The question I have to ask is: "Can you handle the truth?” Of course you can, if you really want to sell your business! That, my friends, is your breakthrough business strategy for this month. I’ve said it before and I’ll say it again: Hire a business coach if you don’t have the internal resources to manifest change. Be sure your coach fully understands the selling and buying process, how to increase the value of your company and how to stand by your side and encourage you to reach your goals. If there is anything that you want me to address in my monthly column, please send an e-mail to
Please be sure to put “SMALL BUSINESS MONTHLY” in the subject line, so that we don’t mistake your e-mail for spam. Also, sign up for our newsletters by visiting the home page of our Web site, www.dovetailadvisors.com. You’ll receive some great articles to help you improve yourself and your business. Laura Maver Ward is a certified business intermediary and a certified business coach who is passionate about helping business owners and business leaders run their companies, so that they can live today and retire tomorrow in the style they want and deserve. Ward is president and founder of Dovetail Business Advisors, a mergers and acquisitions and business coaching and consulting company. It is through "breakthrough business strategies" that Dovetail helps business leaders turn potential into breakthrough performance. You can reach Laura at (816) 448-3777.
