What Some Business Owners Think Their Business Value is?
What's a Business Worth to You?
Business Value - You think it's worth what?!?!
Often in our line of work we deal with business owners who would like to sell their business. Sometimes they have good reasons and sometimes not. Either way the topic of "what's my business worth?" surfaces pretty quickly.
Let's go through a couple valuation methods that I all too often run into when someone calls me to talk about selling a small business. All the names are made up but the situations sure aren't.
Let's meet John......
He owns what some would call a little machine shop.
John calls me one day, we have a brief introduction and I set an appointment to visit John at his machine shop to talk about selling his business. After I tour his facility we sit down and the conversation goes like this.
Me, "John, you are obviously thinking about selling your business can you tell me why?"
John, "I've built the business up over the last 4 years and I'm ready to sell."
Me, "Owning a business 4 years isn't very long, why sell now?"
John, "The timing is right, I hear the market is hot for machine shops."
Me: "You say the timing is right and the market is hot why do you think those things?"
John, "Because my buddy Joe sold his machine shop for $1million and I only want $500,000 for mine, so I know it will sell."
Me, "How profitable is your little machine shop?"
John, "well, it's not now but it's ready to take off."
Me, "how did you come up with a price of $500,000?"
John, "I've lost about $125,000 per year for 4 years, that equals $500,000 and that's all I want is to get my $500,000 back. It's a great deal."
Me, "why would someone pay you $500,000 to lose $125,000 per year?"
John, "Because it's ready to take off." Me, "if you don't sell the business what will you do?" John, "I'll shut it down, I'm out of money."
Now let's meet Mary the Staffing business owner......
I go to visit Mary. Me, "Mary thanks for seeing me. Why are you thinking about selling the business?"
Mary, "I've owned the business 15 years, I'm 62 and I'm ready to retire."
Me, "How is the business doing now?" Mary, "it's ok, pretty steady."
Me, "Is the business profitable?" Mary, "Yes, counting everything I make about $100,000 from the business."
Me, "Have you thought about how much think the business is worth?"
Mary, "Yes, I know exactly what I want for the business." Me, "o.k., what do you want for this business that makes $100,000 per year?"
Me, "How did you come up with that price?"
Mary, "I want to keep getting $100,000 per year and I need $2,500,000 to invest and then if I make 4% on that I'll get my $100,000 per year."
Moral of the story.....
Never confuse what someone wants for a business with what a business is worth. This issue often happens in reverse as well. A business owner often has a business that is worth more than the owner thinks it worth. Those are much more pleasant meetings for me. Learning about valuation methods that can help yo navigate the business buying and selling process.
- If you want to learn how to create a valuable business I highly recommend these to books: