Business Owners - The Secret to What Your Business is Worth

Business Owners - The Secret to What Your Business is Worth

Many people will assure you that there are specific, scientific ways to value a business and most people believe that this dark art is only known to the select few who are paid vast sums of money for their services.

If you speak to accountants, business brokers, investors or venture capitalists they can give you chapter and verse on how to apply some of the theories. They can tell you about Enterprise Values, Discounted Cash Flows, Price/Earnings multiples, and multipliers of Revenue, EBITDA, EBIT and PBT. The explanations will be filled with jargon and after listening for 5 or 10 minutes you’ll be sitting there in a trance of confusion.

Even senior corporate lawyers and experienced business people have it set in their minds that those who advise on and buy businesses know exactly what they’re talking about and can use their skills to determine an exact valuation for what your business is worth.

In reality, there’s only one real measure of what your business is worth. There’s only one key that determines how much you will get for your business or anything else that you want to sell. It’s the secret that gets continually overlooked and is the cause of much stress and debate around the business world.

The only real measure of what your business is worth is how much someone else is willing to pay for it. It’s that simple. The value of your business is wholly determined by the amount of money someone else would be willing to give you to take it off your hands.

Now, although this is a simple, and much overlooked secret, it doesn’t come without its challenges.

The first major challenge is that the potential buyer often won’t tell you what they’re really willing to pay. This is all part of the negotiation game, and its happening everywhere from the haggling that goes on in a Moroccan souk to employees trying to negotiate a salary increase in offices up and down the country. The object of the game is to find out the real limits of the other person without causing offence or upset.

When someone’s buying a business, then they may be able to get all sorts of additional value from it by combining it with their existing operations. And this may make it far more valuable to them that it would be to another buyer. If a business has a product or service that they know they can introduce and sell to their existing customers then it would be worth more to them than to a buyer who serves a different market. A smart buyer will insist that they’re not going to pay you for the extra value that they’ll be bringing to the deal and that sounds like a logical justification. However, in reality the smart buyer will be willing to buy at any price that still provides an overall healthy profit for them.

The second major challenge is that the buyer will have to justify to their investors why they are willing to pay a certain amount, and that’s much easier when it concurs with the formulae and calculations mentioned earlier.

So how does this help you?

You need to understand what the financial criteria are, so that you can know whether the value you want for your business falls within the expected range. If it’s outside of the range of valuations (i.e. higher) then you will need a good justification as to why someone should be willing to pay a higher price. This may be down to valuable intellectual property, a strong management team, a loyal customer base, valuable contracts or elements that protect the business by making it hard for competitors to enter the market. All of these factors can help to increase the value of your business.

You also want to talk at length with potential buyers to find out what they plan to do with your business. If you show an interest and explain how you want to make sure the business you’ve built is looked after, then a buyer will often be willing to share their plans. This can help you to understand what the real value is to them.

And ultimately, the other key factor in valuing your business is what you want and what you are willing to accept. And finding that out is the objective of the game for the buyer, so you may not want to give it away too quickly.