Mirror Mirror. How Valuable Is My Business?
Published in MMR Magazine.
Ask a group of people how many feel they have excellent listening skills?
Everyone raises their hands.
Ask a group of people how many feel they have above-average intelligence?
Everyone raises their hand.
Ask a group of people how many feel they are excellent drivers?
Everyone raises their hand.
You know what I’m driving at. We all believe that in some way our qualities are above average. Of course, statistically, this is impossible.
If I were to ask you what your business was worth, odds are you would tell me an above-market price. However, if I asked your key managers, I probably would get a much different number. After all, if it comes to your attention, that your most trusted managers have reservations, most certainly a potential buyer would get spooked.
Now imagine someone you trusted asked your business relationships the following questions which could be answered in the pre-COVID time frame.
Employees: How well run is the business?
Managers: Are there problems that decrease the growth of the business?
Potential buyer? What risks do you perceive with the business?
Whether you are decades away from selling your business or you just turned your lights on, preparing a business, as though it will be sold today, is the most valuable “best practice” management advice anyone can give you. The key to “best practices” is a way of understanding and fine-tuning the business.
The key value drivers of any business are the four intangibles.
1- Wellness Capitals- Can also be called aspirations. It embodies the vision of the owner, company culture. It is the soul of your company.
2- Employee Capital- This represents your talent. Your employees, your vendors, your consultants, all of who you depend on to deliver your product and services.
3- Customer Capital- This is the totality of your relationships you deliver products and services to.
4- Structural Capital- Process and data which can minimize the risk of the four Ds. Death. Departure. Divorce. Disability
Intangibles are challenging to grow because as a non-financial asset, they are hidden from view. A valuable tool that is available on my website bhwealth.com/succession-planning offers a questionnaire that provides you an Attractiveness Index Score and Report.
Created by MAUS Business Systems, the questionnaire is designed to help business owners score key areas of their organization: Business Factors, Forecast Factors, Market Factors, Investor Considerations.
Here are some of the questions you’ll be asked to score on a scale of 1-6.
How long have you been operating your business?
In your industry is this considered good?
Would your management team impress a potential purchaser?
Are your customers loyal to your business?
How strong and well known is your brand?
The higher you score in this questionnaire, the higher the likely value of your business is. The report should also be seen as a checklist of areas to improve upon before you try and sell your business. Ideally, many years before you decide to sell. The relative attractiveness of your business to a potential purchaser will impact your overall valuation. Once completed, I’ll forward you a report.
Of all four, you’ll find the investor considerations are the most compelling. At the end of the day, it doesn’t matter how valuable you believe your business is. The only truth is the amount of risk a potential buyer perceives your business has. The more risk, the lower the value. The less risk, the higher the value.
This applies to a strategic buyer, a third-party buyer, a family member, an employee, an investor, or another. In terms of business value, the metrics are the same.
“Best practices” using the filter of succession planning can be developed from a reverse due diligence process, which is designed from the buyer's perspective. The thinking is what would a buyer look for which would maximize the value of my business. This way, a best practice approach is not theoretical. The goal is to always about the perceived value from your stakeholders.
Business owners that go through an exit & succession planning process are more likely to::
- Build a more valuable business.
- Exit the business paying less tax and having more accumulated personal wealth.
- Run a better-managed business that is more profitable and leads to less stress and better personal health.
- Have fewer regrets after they exit and more successfully move into a successful life after exit.
- Have a better outcome that leads to happier stakeholders and family members.
- Protect the family wealth in the case of an unexpected event like death or disability.
Mirror Mirror on the wall, will I be able to exit my business successfully? Who knows, but you can take steps to orchestrate sound financial decisions on your way to the finale.
Jaimie Blackman — a former music educator & retailer— is co-founder of BH Wealth Management. The organization offers 401(k), insurance, and succession planning services. Download your complimentary copy of End Your War With Money at .bhwealth.com/moneycapsules Registered Representative, First Allied Securities, Inc. Member FINRA/SIPC