business Jan 03, 2017
No Matter What Someone Has Told You In The Past About What Your Business Is Worth, They Are 100% WRONG!
There are literally dozens of reasons to want to know what your business is worth, such as for a partnership buyout, maybe for an estate plan or even possibly for an employee stock incentive program. But, if you want to know what your business is worth so you can sell it, then there is only one correct answer.
Your business is worth what someone is willing to pay you for it.
That’s the only correct answer. Someone might tell you that it’s worth 3 times your EBITDA or the adjusted value of all of the businesses assets or you may even hire a business valuation expert to find out. But, in the end when it is all said and done, the answer they give you will be 100% wrong. That’s because the real value of what your business is worth, when it comes to selling it, is simply what someone else is willing to pay you for it and that is completely dependent on WHO you sell it to. PERIOD.
If you were to sell your business to a financial buyer, someone looking for positive monthly cash flow, your business is worth as high as 6 or 7 times your earnings. If you were to sell your business to an employee, you would likely have to finance a large part of the purchase amount and while this increases your level of risk, it could easily double the value of your business. And if you were to sell your business to a strategic buyer, someone that could take your business and use it to exponentially grow their business by 500% in as little as 24 months, then your business would be a bargain to them at just about any price. Remember, this is the same business, with the same assets and the same market and the same everything. But, the value actually grows exponentially because you chose to sell it to a different type of buyer.
You often see this strategic buyer process in use with the great big behemoth companies like Google buying YouTube or Ebay buying Paypal, but you may not realize that the same techniques that billion dollar companies are using, also apply to much smaller businesses just like yours and mine. You probably aren’t aware of this because the transactions that would apply to our businesses usually don’t make the 5 o’clock news. Nevertheless, they happen every single day and these less newsworthy acquisitions are making many entrepreneurs instant multi-millionaires by exponentially growing their businesses, thus exponentially increasing their value, all with the stroke of a pen. This industry is better known as mergers and acquisitions. And though these words can be intimidating to us “in the trenches” entrepreneurs, this industry can actually be tamed and made to suit us very easily. You just need to know how to apply it to your business in the right way. Now before you roll your eyes or dismiss this strategy as too complex or too costly or you think that your information business or your professional practice is too small to apply this to, let me share a quick story with you about a client of mine, and to protect the identity of the innocent we’ll call him Gerald.
Gerald owned a pest control company that was grossing around $600k and 10% profit. A comfortable living for him and his family, but Gerald knew that it would never fund his retirement or the lifestyle he wanted to live if he ever sold the business. So he decided to grow it and then sell it for top dollar through a process called growth stacking.
Through growth stacking, Gerald would seek out and strategically buy other companies and merge them with his company to maximize exponential growth and then sell the much larger, much more profitable company to a strategic buyer. For Gerald, that process started by searching for a complimentary company that met 3 criteria.
1. Had around the same gross revenue as his company, so he could afford to do this deal comfortably.
2. Had the same type of clients but no overlap between his current clients and the acquisition company clients.
3. Had lots of duplication of company business processes.
Once he found a complimentary company that met these three criteria he made the purchase, a strategic acquisition, and at closing, his $600k business became a $1.2 million company. Not a bad day to be able to double the size of your company with the stroke of a pen.
Now Gerald didn’t buy another pest control company, he actually bought an air conditioning company. To most entrepreneurs this doesn’t make a lot of sense, the most logical choice would be to stick with what you know and buy the exact same type of business that you already own. But Gerald was thinking strategically and wanted to maximize the amount of his growth and by focusing on the clients needs and acquiring a complimentary company and not an identical company, Gerald would be able to take advantage of the cross marketing multiplier.
The cross marketing multiplier allowed Gerald to market his pest control services to the air conditioning clients and his business grew from $1.2 million to $1.8 million. He then took his newly acquired air conditioning services and offered those services to his pest control clients. And Gerald’s company grew from $1.8 million to $2.4 million. This is something impossible to do without a strategic acquisition. There is no faster or easier way to double the size of your client list AND have that very critical, well developed relationship with your clients, all with the stroke of a pen.
But Gerald didn’t stop there. This strategic acquisition resulted in a single company that now had a duplication of multiple business processes, meaning that now he had a duplicate human resources department and a duplicate accounting and sales and marketing departments and personnel and equipment, so Gerald was able to increase his growth by another multiple by eliminating all of the duplication between the two companies. He kept the best parts of both business processes, which increased the overall efficiency of the new, larger company and in doing so he added yet another multiple of value to the company while at the same time increasing profits by another 10%.
So with growth stacking, his business size increased by 5 times and his profits went from 10% of $600k, so $60k to 20% of $3 million, that’s $600k. That’s an increase in profits of 10 times! And he did all of this in less than 12 months from closing, that’s the power of a properly executed, well-engineered, strategic acquisition. So as a buyer, Gerald could make just about any price he paid for the air conditioning company he bought a real bargain, because he knew how to fully leverage every penny out of his strategic acquisition.
You may be asking youself “Massive growth is amazing but how does this change the current value of my business?” I am going to ask you to stretch your brain a little bit and think of your strategic buyer as being just like Gerald. The buyer of your business will be someone just like Gerald, a strategic buyer looking to exponentially grow his business through acquisitions. You simply show him how he can make his business worth 5 times his original value in as little as 2 years by buying your business. That would make the money that a strategic buyer pays you for your company a bargain at just about any price!