You think your business is worth a lot of money because you have had it for 15 years. Unfortunately it doesn’t matter how long you’ve run your business. Its the value proposition that you’re offering to the buyer that matters. You could have a business that you ran for 20 years and it could be worth nothing or you could have just started up a business and it could be worth millions. Business owners think that because they put 20 years into their business they deserve to be rewarded. No one cares how long you’ve been in the business
You think your business is worth the amount of money you need to retire. The problem is that it does not matter at all to the buyer what you need to retire. The buyer only wants to investigate what future maintainable earnings are there for him or her, or what value there is in the assets. Otherwise your business is worth far less than your expectation.
Accountants and business owners alike apply the wrong multiple to the wrong profit figure. There are generally accepted ranges of multiples that are applied to particular profit classes. One such multiple, called an EBIT multiple will be smaller than another class called EBITDA for the same business. (Refer to our website glossary of terms for what these acronyms mean) Hence you would need to apply a smaller multiple to an EBIT than to an EBITDA. You would be surprised to learn how many so-called experts apply the wrong multiple to the profit figure.
This is the sin of looking to history when looking for the profit figure. History and past events are relevant but are only as a guide. Many people look to the most recent tax return or a three years average as though it was the only profit marker. A buyer is only interested in next year’s profit. Work on that one and leave last year’s as a guide only.
Business owners think their business is worth the same to a buyer as it is to them. They think of themselves and not the buyer. The mistake they making here is not taking into account the risk of the transaction. The risk of the transaction can be the risk of losing 10% of the clients or 90% of the clients, depending on the relationship that the business owner has with the clients. There are many other risks of the transaction including loss of key staff, degrading of relationships with key suppliers and other risks inherent in a new boss moving into the Managing Directors office. The key is to take steps to remove the risk from the transaction.
As opposed to Historia, which is obsession with the past, Hope is the opposite. It is empty belief. “I hope my business is going to improve.” “I hope my business will be worth a lot of money.” “I hope someone will buy it” Sorry, it will only improve in profit and value and sell for good money if you make it happen. Optimism is a great way to live. Hope is just desperation.
Business owners like to blame others for the state of their business. “My business is worth a million dollars and if its not it’s the fault of the government, the economy, my opposition, the internet, Google, interest rates, the high dollar, the low dollar, consumer confidence, business confidence…” anything that lets them off the hook.
Blame excuses action. No action means that the business will never grow in value.
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Tony Arena (Managing Director)
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This article first appeared on www.valueabusiness.com.au.