Well, that depends…..
Business valuation is a dark art, if you listen to any Corporate Finance professionals that is. But in reality, it is not a dark art, nor is it an art at all.
Business valuation isn’t even a science.
When advisors talk to you about your business being valued at the ‘net present value of future cashflows’, then just a moment before your eyes glaze over, take a deep brief and repeat after me:
‘No it isn’t….my business valuation is very simple and I don’t need complex advice to nail down what is it worth’.
Now this doesn’t help you right now as you are probably sat thinking about a multiple of X times profit, or Y times revenue.
And to be honest, that kind of ‘yard stick’ is a good starting point.
But to get the valuation spot on, you need to realise what drives business valuation.
And the only thing that does drive business valuation is…..
Yep, business valuation is all in the mind.
Specifically in the mind of the person who wants to buy your business more than the person (you) who wants to sell it.
In reality, your business is worth exactly what someone is willing to pay for it.
Not a penny more nor a penny less.
Balance sheet values and profitability play a part, frankly a small part and the only part they do play is helping to assess just how much someone is willing to pay for your business.
And their business valuation is entirely subjective.
Nearly all business acquirers have one thing in common, they will only ever buy your company for less cash than it would cost them to build one like yours for themselves.
Now here is the rub, this cash element isn’t just cash expenses, but it includes the opportunity cost of lost sales whilst they build a business like yours.
And this is where business valuation becomes entirely subjective.
There are of course quantitative factors such as historical performance (hence annual accounts and management accounts should show your real position and not include ‘those’ expenses that are actually your own personal expenses). Acquirers will also have access to a database of recent sales of similar businesses so they will know the market better than you will.
But qualitative factors play a far bigger role in driving business valuation.
Key to business valuation is management strength and business process.
These two aspects are the biggest driver of business valuation.
Because acquirers want a business they can take over, exit you from and then continue to build and grow the profitability – after all, that is what every business exists for, to provide a financial return for its investors.
And that is where you as an entrepreneur should spend most of your time, building a profitable business that works, without you.
How do you do that?
That’s the hard part, but the first step is to stop being an employee and having a job in your business and to become an investor in your business. That means taking your income via dividends and paying someone else to manage the business for you.