and what that means to your business value.
When it comes to selling, one of the most common misunderstandings a vendor has about their business is that they even have a business to start with.
Either the owner continues working in the business, or they close it down completely.
Too often, vendors go to market without proper guidance from their broker, and they try to sell the job thinking it’s a business. So the business gets listed, stays on the market like a bad smell then eventually comes off the market.
My name is Mick Godwin, and over the years, I’ve heard every type of interpretation of what a business means.
In this article, I’ll explain the top 3 ways to identify if you have a job or a business to sell and what that means to your business value and sale price.
Reason #1 What’s Your Involvement in the Business?
There are two approaches to earnings when it comes time to determine the business value; either PEBITDA or EBITDA.
I’ll cover what they mean in a moment, but first, let’s use a fictional business owner called Kevin as an example.
Kevin wants to sell his chandlery business, ‘Kevin’s Chandlery’. Kevin’s Chandlery has afforded Kevin a decent living over the past ten years.
He’s been able to pay his bills, take four weeks’ holidays per year, earn $150,000 and is at the point where he only works Tuesday – Saturday. He’s got a team of 10 employees who help him keep the business running.
In this instance, Kevin has a job, and the value of Kevin’s business, i.e his business value, will be approached on a PEBITDA basis (proprietors’ earnings before interest tax depreciation, amortisation).
Rarely and I mean rarely, does a listed business assessed on a PEBITDA basis achieve higher than a capitalisation rate of 50%.
In other words, a multiple of 2.
With this in mind and ignoring many other factors that drive value, Kevin’s Chandlery may sell for a maximum of $300,000. But realistically, the settled price would be a more modest result, around the $250,000 mark.
Reason #2 Who’s Hiring, Firing and Reporting?
Now, let’s look at Kevin’s competitor George. George runs an identical business selling the same products and even earns the same amount as Kevin. But George spends his days fishing and only has a meeting each week or month with his general manager.
Usually, the meeting consists of his general manager informing him what employees are hitting their KPIs, any roles that need to be filled and what stock should be promoted and sold.
George hasn’t needed to hire or fire anyone in years. His general manager does that with the support of the systems George implemented into the business.
The G.M. has all the data he needs at his fingertips to allow for precise analysis that helps both George and his manager make sound decisions when required.
And he has integrated his CRM with marketing to ensure old customers come back and new customers are satisfied. George has a business. Thus, George’s business value will be determined on an EBITDA (earnings before interest tax depreciation, amortisation) basis.
So even assuming he brings in a little less profit than Kevin, he’ll achieve more on the market.
Reason #3 Hands-On Training or Business Systems?
If you are responsible for training new staff, then you hold all the operational I.P. in your head.
As soon as you leave, the new owner will be at the mercy of trying to figure out everything you have learned in a very short period of time.
Hence another reason no one wants to pay too much.
Operational handbooks are about as helpful as fax machines in today’s world. Innovative businesses have video training throughout the business, and employee skills overlap to minimise disruptions when onboarding new staff, regardless of whether the owner is there.
In other words, Kevin hires staff to help him do his job successfully; George has a business with systems that allows his employees to do their job successfully.
George’s systems-based business will usually achieve at least a three multiple despite its profits.
In this case, a full $150,000 or more than Kevin.
Transforming your job into a business has no drawbacks. However, more time, better profits, and a higher business value result from owning a business rather than a job.
If you want to know more about what’s involved with selling your business or increasing your business value, book an appointment here or email me directly at the details below.
I’ll tell you exactly what information you need to understand where your business sits in the market so you can make better business decisions when it comes to selling your business.
I’ll be happy to help you become clear on your next step to exit your business successfully.