It’s a disheartening fact that many people have a fabulous business, with a healthy turnover but routinely get slapped in the face with low valuations. It can be very disappointing and from time to time it can be insulting. How does this happen? What’s going wrong in a business that appears to be going so right – and has done for many years?
Would it be rubbing salt into the wound if I said it was all your own fault? No?
It may not be by the way but I’m about to outline an all-too-common trap. Okay what are some of the obvious things an investor, a potential business partner or even a co-owner would look at before handing you a duffel bag full of cash for a slice or all of your business? Profit? Definitely a top 5. Operating costs? Sure, that’s important. What about the magic number – how much has to be earned to ensure that some debt is paid down, expenses are covered and ownership gets their fair share? A must.
And of course sustainability – how long will the business continue to produce the necessaries? Is the future bright or bleak? What needs to be done to ensure that your business meets expectations well into the future? If the answers to those questions depend largely on you, there’s a problem and it needs to be addressed.
The most attractive businesses to buy or buy into and therefore attract the highest multiple, are those that will keep ticking along, producing the numbers that matter, regardless of your presence and direct input. Think about a donut shop (delicious) and how it might work. Machines automate the process, staff run the shop and man the front of house, you work on the brand building side and drive the culture. Great, so what happens when you take a two week trip away with the family. No significant change to process, protocols, profits? No? Great. An interested investor may well consider an offer that looks at your annual profit and multiplies (hence multiple) it by say 3 to arrive at a figure. That’s not a bad start.
But this one is. Same donut shop. However, you yourself mix the dough to a secret recipe handed to your grandmother by a visiting gipsy. It’s done by hand and only after you yourself have received the secret ingredients under cover of darkness from an unnamed courier, mixed the dough and cooked the treats, can your staff go ahead and sell the sugary delights. This is a huge red flag because without you, the business will absolutely fail.
This is an extreme example but there are numerous versions of this scenario in evidence today. Unfortunately for them, some owners don’t want to or can’t bring themselves to share the knowledge they’ve locked up in their brain.
Keep in mind that nobody wants to buy into a problem. You can almost see a potential buyer or investor pushing back from the table when things start looking complicated or there’s an obvious over-reliance on what’s locked away inside you. Here’s what to do:
Regardless of whether you intend to sell or whether or not you’re looking for investors, this represents sound business practice and it’ll stop people from hurting your feelings as well.
To remain calm in the face of negotiations and be pleasantly surprised by valuations that reflect the true worth of your hard work, do contact us to chat or test drive an accountant that can help you.
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