The value of knowing your business value
By Colleen Bate
Do you know the value of your business and if not, why not? Perhaps you may believe that it is unimportant if you have no plans to sell in the immediate future. But is this a misconception?
Basically, If you value your business, you should have it valued. It's vital if you are planning to sell it or are coping with any health related issues or disabilities. It's also a trump card to use when motivating business partners and/or employees to be more efficient, productive and profitable.
If these are not reasons enough, let's look at a few more.
Growth - If you plan to grow your business you have to start from somewhere. Getting your business valued provides you with the tools necessary to help your strategies for growth and improvement. You'll be able to see how much (or how little) it has grown over a set period, ascertain areas for improvement and confirm the factors which are having a negative impact on your business.
Investors - If you are seeking investors it is vital to understand the true value of your business to take advantage of investment opportunities when they arise. A business valuation will essentially provide you with a snapshot of your business performance at your fingertips. This means you will be able to provide potential investors with business history, legal structure, financial information etc on demand.
Funding - if you need to obtain funding from lenders and financial organisations to expand your business, it's critical to have regular and up to date business valuations to take Into consideration fluctuating market conditions, competition and financial conditions. This will highlight areas that need attention before you seek funding, and help your strategic planning for the future.
Death, divorce, disputes - If something happened to you, would the business keep running? And would it be easy for others to obtain proof of the value of your business? Up to date business records are important if others have to get your estate in order. They can also be beneficial in legal proceedings such as divorce or audit investigations.
Mergers, acquisitions - With a clear picture of your business financial position and an accurate insight in the value of your share of the business, you can achieve the best possible outcome when it is time to strategise a new way of doing business.
Retirement - is a common reason why owners sell their businesses. Often it is a difficult decision to make - owners put their heart and soul (and in some cases, most of their savings) into their business for a number of years, hoping to retire with a comfortable little nest egg. It makes sense to put plans into place from day one to have your business valued regularly. This will help you forecast (and ultimately strategise) how much you need to generate from the sale of your business so that you will retire comfortably.
Wide Format Online magazine recently conducted a survey, asking the industry if they knew the value of their business. We also spoke to two of our classified advertisers who are currently selling their businesses, to gain insight into their experiences of the process of selling, valuation and plans for the future.
Survey results: Do you know the value of your business?
A few survey respondents confirmed that they had no idea of the value of their business. One respondent said "If I wanted to sell, I would employ an expert to give me an estimated value".
A consulting broker responded by suggesting a different question be asked. That is "Do you pay attention to increasing the value/worth of your business or do you just chase revenue?" He clarified that "increasing the worth of your business need not mean simply increasing revenue" and went on to state his belief that the vast majority of owner operators within the broad graphics segment don't pay anywhere near enough attention to the worth of their business. He re-emphasised the importance of a business evaluation (as highlighted above): "All well and good to say it doesn't matter because you don't want to sell for quite some time but what happens if illness or debilitating accident strikes?" He went on to point out that in spite of being covered by an insurance policy, "not at least seeking to continuously increase the worth of your (probable) largest asset may more than counter any insurance policy you hold."
A signage company business owner who is experienced in employing a number of industry professionals and has negotiated with some of the best when selling service businesses believes that there isn't a 'true' value. He says it is very subjective and goes on to illustrate his point using a print or graphic design company as an example: "There is a 'market value' and there is a 'net value' applied by accountants when they weigh up the net assets. Just to confuse you even more there's the sales averaged over the last two years muliplied by a factor (in the service industry from 2 to 10 times). Then there's the best one for a seller- average the net profit before tax for the last 2 years and multiply it by a factor up to 20x for intellectual property including potential growth. Just when you are getting excited and the deal is about to close, the buyer brings in chartered accountants to do due diligence and they spot that you haven't allowed for long service leave in your P&L as a liability (because you never did!) and they whip that off your price agreed. So it's an easy question with many answers depending on who you are talking to." He suggests a quick and easy way of working out the value of a business is to "average the last 2 or 3 years net profit before tax and multiply by 4."
A sole trader said that his business had no worth whatsoever, since he had no staff and believed that "there was no business to really sell". He also thought that one person (as a sole trader) would not want to take on "all the tasks required these days". He advises that others in the same boat should invest some money in areas such as shares, property or superannuation, "just in case the business has no value".
A business owner for a leading display and signage company believes that sustainability should be taken into account when a business is valued. "Sustainability should not only apply to your business but also extend to your clients' business through your products and services," he says.
Insights from two Wideformatonline Classified advertisers selling their businesses:
Signography is a well established graphic design, print and signage 'walk in, walk out' business for sale in Shepparton VIC. It has a large quantity of tools and equipment (including Roland printers, CNC flatbed router, heat press, laminator etc etc), plenty of stock inks, office furniture, two graphic loaded PCs and "lots more". Established 16 years ago by Bill Hickman, Signography has a small and unique niche style of business - it's very different to other larger signage businesses in the area, which are targeted at large corporate businesses.
Bill has valued his business by way of its assets, stock, history and client database. Other factors that add to its value include the fact that it is a growing business in a great location with exposure to highway traffic and that it is relatively easy for two or three people to operate.
Bill is selling the business because he is planning his retirement.
JK Creative Design and Signs
Sign making and printing company JK Creative Design and Signs is currently owned by Gordon Chen, who purchased the business almost 20 years ago from a long time friend in 1996. It lives up to its motto to provide 'quality signs and fastest services at reasonable prices' and includes equipment such as the HP Latex 315 LFP and a one year old GraphTech Cutter as part of the sale. It's a small local business in Campsie (previously Padstow) NSW so there are no 'head-to-head' competitors.
Gordon tells us that his company was valued on the basis of its history as an established business with solid clientele - local customers who are SME enterprises, large corporations such as Avis and Storage King and government agencies such as the Federal MP Office.
Gordon says he is selling his business because the market is becoming more and more competitive as clients demand cheaper prices for better quality. Essentially this can be tricky for smaller business as they have to compete against the bigger industry players which commonly secure bigger projects.
Despite the fact that he has had to contend with this struggle (particularly in the last two years), Gordon has still managed to pay his own salary. However, he believes that the business needs a boost - his ideal buyer is "someone who understands this industry and has sufficient resources to be able to expand the business."
Once he has sold his business Gordon plans to explore other business opportunities or perhaps even return to the workforce as a full time employee.
As emphasised in these insights we've shared from both Bill and Gordon, knowing the true value of your business can be seen as a value in itself. And it's an ongoing process - just like a medical checkup, regular business valuations are a healthy way to look after your business and plan for the future.
So, how well do you know the value of your business?