I ask, because most business owners, at some point, envisage someone somewhere paying a fat sum to take the fruits of their labours off their hands.
They’re probably not putting enough away in a regular pension scheme, so the business itself is effectively their main pension plan (I know mine was). For most people in this position, they only get one chance to maximise the return on their investment. However, mention the words ‘exit strategy’ and you often get a very defensive reaction, bordering on denial.
“I’m far too young to be thinking about that” or “I’m not planning to leave any time soon.” Well, maybe so, but if you don’t have any idea where you want the business to be when you are ready to pull the curtain down, how do you know what steps to take to get it there?
That’s why I try to get my clients to ‘start at the end’ and envisage what the business might look like ‘when it’s finished’.
By the way, if you’re a one-man-band or a lifestyle business (or both), and have no intention of ever becoming an employer, none of this applies. Your business is worth diddly squat, apart from a few bob for your customer list – maybe. Sorry. (OK, if you have a ludicrously profitable E-commerce business that you’re running from your bedroom, you might get lucky).
And how can you increase its value?
Earnings multiples – the traditional short-hand method of business valuation – are subject to all sorts of variables, such as market sector, market sentiment, geography, competition and so on. In the boom years of the 1990s, some sectors were commanding ten times earnings – even 20 or 30 times in some instances. In the straitened noughties, you’ll be lucky to get three or five times earnings.
Ultimately, of course, a business is worth whatever someone is prepared to pay for it. If you can get more than one interested party to the table and conduct a Dutch auction, so much the better. Generally, however, the business owner’s view of the company’s worth is at considerable odds with the market’s assessment (assuming there is a market at all – take nothing for granted).
Recently I came across a tool that enables business owners to get an accurate and objective valuation of their business, based on all the variables and prevailing market conditions. (No guarantee that anyone will pay the bottom-line figure, of course.) So far, so … well, so what?
But much more interesting is the linked study that analyses the specific aspects of the business that are depressing its value and those that are enhancing it.
In other words, this forms the basis for an action plan that can double or even quadruple the business’s ultimate value. What does it cost? Don’t be silly: if you’re serious about constructing an exit strategy, the relatively small amount involved is a tiny but vital investment with a huge potential return. I wish it had been around when I was running my marketing services agency.
One area that will have a big impact on the price you’ll get is your importance to the business. Ask most owners how important they are to their own business on a scale of 1 to 10, and they’ll say 11 or 12.
And although much of that may be down to ego, the truth of the matter is that the higher the number they quote, the lower the value of the business as a trade sale. The less your business depends on you for its operational efficiency and profitability, the more it is worth to an outsider. Up to eight times more, apparently.
Think on that when you’re doing your sums. Michael Gerber really does know what he’s talking about.
How do you make the company less dependent on you? That’s another story. But you could ask me, and K&H, for clues.
David Croydon runs Hilltop Consultancy, working with ambitious, successful business owner/managers to help them grow and add value to their businesses.