Why the value of your business means more than a price tag

After building a business from the ground up and finding success, some business owners may be tempted to cash in on their hard work and sell their enterprise.

To do this a business needs to be correctly valued to ensure that the right price is obtained. As well as making sure that business owners don’t sell themselves short, there are other benefits that a thorough valuation has. Before these can be explored, we must examine the process of evaluation.

The process of putting a price on a business

Typically the value of a business is offered as a multiple of the enterprise’s net profit, which can be increased in several ways.

For example, smallbusiness.co.uk states that a business is deemed less valuable if the running of the enterprise depends solely on the presence of the owner. However if more members of staff are able to step in to operate the enterprise when the owner is away then it may be valued on a higher multiple.

Other factors that can increase the value of a business are identifying a unique selling point over competitors and proving that the business has growth potential and could be rolled out on a larger scale or franchised.

Using the process to benefit your business

Following steps considered important in the valuation process can open up opportunities to increase the selling price of a business, as well as additional benefits.

For example, to prove that a business has potential for future growth, the business owner will have to examine ways to make their business sustainable for the future. Although London based business brokers Avondale state that planning for future growth is an important part of increasing the value of a business, it is also essential to ensure the long-term survival of any concern.

Whether a business owner is planning on selling their enterprise or not, this step can be utilised to increase value as well as build a more secure future. Also if the proprietor knows that they have healthy growth ahead then they can make the decision whether to sell or not in the full knowledge of their business’s potential.

The importance of knowing the value of your business

Knowing the correct value of your business and its potential growth (and therefore potential increased value) is incredibly important to ensure that owners get a fair price for what they have worked hard to build and to avoid losing out in the future.

A cautionary tale that demonstrates the dangers of ignoring the above is the case of Roy Raymond. Raymond founded the lingerie company Victoria’s Secret in 1977 and after the original store made $500,000 in its first year, quickly expanded the business to three more stores and a mail order catalogue.

Five years later the company had expanded to six stores and was grossing $4 million per annum when Raymond sold it for $1 million to retail magnate Leslie Wexner. However, by 1995 Victoria’s Secret had become the largest lingerie retailer in America, reaching an annual revenue of $1 billion.

After seeing the empire that he created flourish without him, Roy Raymond committed suicide in 1993 by jumping off the Golden Gate Bridge in San Francisco.

Although his suicide could be a result of several contributing factors, including another bankrupt business and a divorce, it could be said that the catalyst that started it all was selling Victoria’s Secret for a fraction of its future worth. At the time of sale it was reported that the stores were approaching bankruptcy because of poor market targeting and lack of vision, so could Raymond’s tragic demise have been avoided if he had evaluated his business, defining his USP and accurately predicting sustained future growth?

How valuation tactics are being used now

To avoid this type of undervaluation happening again business owners now appear to be holding out on early sales and are being taught to think big when it comes to valuing their business.

In the 2010 film The Social Network which is based on the evolution of social networking website Facebook, entrepreneurial character Sean Parker uses Roy Raymond’s tale to warn founder Mark Zuckerberg with the line:

“A million dollars isn’t cool. You know what’s cool? A billion dollars.”

Although the film is an adaptation of life events, it does reflect the truth of the real business. Mark Zuckerberg didn’t sell Facebook and later divided shares of the company with investors and employees – his tight grip on his company paid off, as of February 2014 his personal net worth is $27.9 billion.

Evan Spiegel, co-founder of self-destructive photo sharing service Snapchat, also seems to be aware of the importance of correctly valuing an enterprise, as he recently rejected a takeover bid of a reported £3 billion. Spiegel has apparently given the future of his businesses as the reason behind the rejection, as he believes that the predicted growth of Snapchat users and messages will justify a larger offer in the future.

Therefore by correctly valuing a business and priming it to fetch a higher price through setting it up for healthy future development, owners will not only get what they rightfully deserve but do the best for their enterprise, even if its value doesn’t match up to the monstrous sums seen in the media.

Sarah Willis is a freelance finance and business writer working out of Brighton.

For more on this, check out our list of common mistakes when selling your business

 

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