|How much is your business worth?|
There are many books and articles covering different ways to value a business. Some use profit multiples. Others look at revenues. And there are those from the tech-boom years that focus on future growth.
The reality of it all is that none of these methods matter if the author is not willing to buy the business from you. How much is a valuation worth if no one would pay it? In a market, prices are set by market players willing to sell or buy an asset. Everyone else is just noise.
Let's look at Apple's stock to help us understand better. Two days ago, on January 28th at 10:30 AM, AAPL reached a per-share valuation of $513.00. Today, also at 10:30 AM, each share dropped to $498.69. In just two days, the shares dropped $14.31.
|Apple Inc. Logo|
Can an industry analyst argue that the company remains just as valuable today as it was two days ago? Yes, of course. I am even sure that the analyst would offer great reasons why the valuation should remain at the $513.00 price. But his opinion is garbage. To talk costs nothing and thus has no value. There is no way in hell that Apple is worth the $513.00 today. How do I know? Simple; because no one paid that price. No one who was willing to part from their cash was willing to do it at $513.00. And believe me, with close to 25 million shares sold, there were plenty of opportunities for someone to pay the higher price. Yet, not a single buyer did.
What's interesting is that all sellers would have preferred to sell at the higher price of two days ago. But with no willing buyers, they had to settle for the lower price. Alternatively, their other choice was to sit on the shares and not sell.
The same applies to your business. You may think that your business is worth, say, a million dollars. You may even have documented evidence of why it's worth the price. But does it mean that it's worth the million? No! Not if the highest bidder offers much less for it. This means that you too may have to select between taking a lower price or to not sell if your highest bid is lower than the million.
The problem here is that many business owners never plan an exit strategy. As a result, they usually try to sell the business when they have no more time to wait. This is why, after listing a business for sale with a broker, the owners often get tired and give up. They take home whatever inventory is left and break the lease. From one day to the next, a viable business is closed. Because of a lack of planning and the unwillingness to take a lower price, the owners run out of time and get nothing instead.
|Do you have an exit strategy?|
When it comes to buyers and sellers finding each other, selling a business is worse than the real estate market. Just the fact that a home seller is willing to advertise to everyone while the business seller isn't should clarify the reasons behind the difference.
Compare this to buying Apple stock. Within a fraction of a second, I can sell my APPL shares without any concern of who is at the other end of the transaction. There is plenty of liquidity in the Apple shares market. Furthermore, I know the exact price it is worth at any time. Pricing information is publicly available through the stock exchanges. Better yet, the price is not determined by analysts but by buyers putting out their cash. There is a high degree of transparency in this market. Clearly, selling your business lacks both, transparency and liquidity in the market. This means that selling requires adapting.
|Time compensates for liquidity|
Remember that your goal all these years was to run the business in a way that would give you the highest standard of living rather than the highest valuation. They are not the same. In fact, many common business practices destroy valuations. Now that if this happens to you, don't worry; you are not the first.
Next, you should understand that any valuation given to you by an expert is garbage. The only valuation that you can take to the bank is that from a willing buyer with cash on hand. So, have some flexibility.
There is nothing wrong with thinking that you are the best negotiator in the world and that you will get the best deal; every business owner thinks the same. But no amount of negotiation will reliably help you sell your business if your valuation is unreasonable. If you ask me, I think that your odds would be close to those from playing the lottery. I would advise to take an alternative with a higher probability of success instead.
Think of the following:, buyers do not want to buy your business just to make you happy. Rather, real investors, the kind who would know how to find you, are interested in making money and don't care much about anything else.
To make money is not to buy and sell stuff. Many businesses buy and sell every day until they go bankrupt. High profit percentages aren't good enough either, if sales are so low that receipts do not cover costs. Even high profits in paper are useless. Most naive business owners fall under the trap of thinking that the P&L is all that matters to the business.
No! They don't want funny P&L's. Investors want positive net cash flows. Just look at what commercial banks measure when deciding on a loan for your business. Cash it's what matters. Even Warren Buffet is famous for looking at cash rather than the P&L.
|When cash flows are negative|
So tell me, how much is your business equipment worth if your business is not creating positive cash flows? The answer is "nothing". How much is the building worth, assuming that you own it, if there are no cash flows? Zero! Have you ever heard that many businesses are worth more broken apart than together? Well, you now know why. If your business is located in a building you own, I may advise to sell them separately. If the business produces very little cash, it will drag the value of the building down. Subsequently, a buyer looking at having to buy both may not be willing to pay the price you are asking for; which will surely make you think that the buyer is unreasonable. But in reality the opposite is true. Think of it in the following way. If a buyer seeks to get the highest return on his capital, why would he put cash into a asset that doesn't improve returns. Often, large capital outlays will reduce return on capital. This is why Dell's model is much more profitable than Apple's. Dell never had to use cash to buy a piece of inventory. Apple does.
|What is your return on capital?|
I can not stress enough the point that the way you run your business may not be what gets you the highest valuation. Things like high net cash flows, fast growth, and high returns on capital are very important when attracting serious buyers. As you can see, these three prioritize money. Your management style, on the other hand, prioritized you.
Finally, be flexible. Whenever I look for buyers, I always try to find what the buyer values more: P&L, Statements of Cash Flows or Balance Sheet. Are they seeking to show the highest difference between input and outputs? Are they in a capital intensive business or are they growing fast? Are they trying to improve their Debt Ratio? This is because a buyer may be willing to pay a higher price if it helps them improve cash. Terms are a great alternative in such cases. This brings me to asking you: which of the three is most important to you. Knowing what matters to you and to the buyer will help you both get a deal where everybody gets what they want. The message here is that you need to customize to get the best deal.
In conclusion, plan your exit as soon as possible. Do not wait a minute more. After your business earns you a comfortable living, learn the things that can get you a higher valuation. Incorporate this knowledge into your business. Give yourself time to find the best buyer. Be flexible with the price. There are ways to exchange an asset for something other than just cash-at-front. Be creative when making the deal. Good luck.