Have you ever asked yourself what your business is really worth? It’s likely you don’t know the answer, and that’s a big problem. Valuations can help you.
As a business owner, you deserve to know the value of your most prized asset. The benefits of knowing vs the drawbacks of remaining left in the dark are significant.
So let’s examine them together.
Massive business exit numbers
76% of owners will exit their business in the next ten years. Most of these businesses are owned by Baby Boomers, who are now simply getting older. They’re looking to sell or pass down their business to the next generation.
An alarming 88% of these owners do not know what their business is worth, yet they’re relying on the proceeds from a future sale of the business to help them fund their later years of life.
This just doesn’t add up…
The answer to this important question is well worth asking…for so many reasons…
But where does the hesitation around getting Valuations come from?
Is it the expense?
Is it time out of the business?
Or do you perceive the process to be too difficult?
Whatever the reason – you deserve to have the insights offered by Valuations. The good news is it’s never too late to start.
Who is driving the Valuations conversation?
The Valuations conversation usually happens when you’re:
- Looking for investors to help fund your growth
- You want to sell your business and know what price you can get for it
- There’s been a disagreement with your co-founder on the direction of the business and you want to buy them out
- There’s been a death in the family and the surviving partner needs to work out how much to pay the other
What all these moments have in common is that they are centred around big decisions.
Not just for the business – but also the stage of life you’re in.
I think the Valuations conversation should be centered around more positive pursuits than dealing with liquidity issues or breaking up a business.
Because if you use Valuations the right way – to grow the equity value of the business – you will find the business will start to evolve in a better direction. And when the big decisions arrive you’ll be way more prepared.
Valuations are a moving target
Valuation is not a static figure like some people believe. It moves in seasons.
Some seasons you’re up.
Some you’re down.
This pattern repeats itself all the way through the business’ lifecycle.
Valuations are really no different to the share price listed on the stock market. The only difference is listed businesses have a market mechanism to compare their company to others and an index to track it all.
This index does not exist for privately held companies – but that doesn’t mean your Valuation doesn’t move up and down.
That’s why it’s important to know what your Valuation is at every stage. It shouldn’t be a one-off thing or some report you get when you’re going through one of the big decisions.
Knowing your Valuation and what drives it is vital for playing the long game.
Because reality is about to set in for so many owners.
Before you were competing with others in your industry for market share and growth.
That was all fine a few years ago.
However times are changing and technology is rapidly evolving. Most mature businesses are not making the investments necessary to keep up with it all and in the end it will hurt their share price.
If Equity is the future the best time to start planning for it is now.
As the saying goes, “the best time to buy a house was 20 years ago” and “the next best time is today”.
Understanding your Valuation will give you proper direction, allowing you to work “smart”, embrace technology and use it to build businesses that can scale without you.
Shifting attitudes toward value building
On top of ‘father time’ a new breed of founder is emerging. Value builders.
It’s worth highlighting the key differences between them vs a typical owner who started their business years ago…
Typical Owners |
Value Builders |
| Prioritise growing revenue | Emphasis on growing equity value |
| Use proximity as a competitive advantage (we’re your local business come and support us) | Offer a product or service with a durable competitive advantage |
| Sell lots of things to few customers | Sell only a few things but to many customers |
| Find themselves in the weeds of the business operations (their business is way too dependant on them) | Build businesses that can grow and operate without them |
| Strive for satisfied customers | Attracting customers that will refer and repurchase |
| Use a transactional business model | Focus on building out recurring revenue streams |
| Treat their business like it their own personal bank account | Obsess over how their business converts its profit into cash |
| Shares equity without going through the right Valuation and due diligence process | Protects their equity and knows the true value of their business |
The jet fuel splashing over the runway for SMEs
While there is new approaches taking shape in the market with how business owners are responding to the way they do things there are also three major macro trends in the background.
They are hard to see if you don’t know about them. But easy when you do…
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The baby boomer population is starting to turn their attention to the finish line. They want out but too many of them will want out at the same time which will cause a wave of price pressures on the asset class. Around the globe it’s estimated 10,000 boomers will retire every day.
That is a lot of businesses for sale.
There is an entire generation of the population who need to maximise the value of their business, but too few of them are being pro-active about it.
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There’s fear the economic downturn as a result of the pandemic will be similar to the recession of 2007-2009.
Many owners operated their businesses through this period in some of the worst economic conditions in history.
For those savvy enough to survive, the pain of those years has still left a scare. Many will not have the energy or interest in weathering through a similar scale of economic pain again. As a result many business owners will want out, not just the Baby Boomers.
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Volatility in the stock market (combined with super low interest rates) means private equity (people with fast sums of money and capital) will look to acquire interests and or buy smaller companies for better cash on cash returns.
This one is worth exploring further, but there are some drawbacks for most businesses. Institutions or large private equity groups are return seeking monsters. They may have big fat cheque books but they are much tougher markers than your competitor down the road.
But nonetheless these private equity groups will be out there looking for smaller businesses to buy. This flow of capital may drive up Valuations but in my experience most private equity groups are opportunistic buyers - so businesses will need to up their game if they want to ride this particular wave.
These trends are unfolding in the midst of everything going on.
Given they are macro in nature, they will not be going away any time soon.
The drawbacks of ignoring your Valuation
Despite an increase of awareness about the issues impacting SMEs – there are too many examples of people trying to go it alone – and then regretting they did.
By using a Valuation and equity value approach where the focus is on creating sustainable competitive advantages, earnings and growth without reliance on owners is a massive opportunity worth exploring.
Not only will your business become more valuable over the years – it will also give you better options.
Yet too many owners are pacing the halls, hoping that one day someone will come and take their business off their hands.
I guarantee you this.
That day will never come.
Getting a Valuation for your business should not be viewed as confusing or expensive. It’s the first step of the process to value building.
There are so many great technology platforms that enable Valuations to be completed for a very reasonable cost – this cost, compared to the value and insights this process provides demonstrates a clear upside for the business owner.
There really is no excuse. And the opportunity cost to you could be substantial if nothing meaningful is done.
The longer you leave this the more the macro trends will take hold and your business may be too late to the ‘cash me out’ party.
Nothing ventured. Nothing gained.
Time to take action and get started
We’ve designed a simple one minute survey that gauges your business’s current condition and whether it is ready to grow, fund or exit.
As Chartered Accountants, we perform Business Valuation engagements all the time but unlike most advisers who play in this space we’ve added extra layers to actually partner with you on your Value creation journey.
We have taken Valuations in a direction that enables a business to know their Valuation and how to maximise the equity value of your business before you sell.
We call it Valuation as a Service (VaaS), linking Valuation to your business strategy and integrating this with your numbers, cash flows and finances.
This allows you to get across the financial aspects of Valuation but also how you can improve your operations and handle your growth in way that factors all the non-financial risks as well.
Let’s position your business the right way so when a buyer comes along – the deal makes complete sense.