We’re big fans of spreading the love when it comes to arming business owners with useful information. We do this at Allan Taylor not only by creating original content on our blog, but also by sharing great articles about M&A and business valuation written by others (mainly through Twitter).
We recently ran across this gem of a quote in an article by exit planning guru, John Brown:
Hank didn’t realize it, but in obtaining a professionally prepared valuation report, he had more information at his fingertips than most owners do.
The first time you get a business valuation can be a real eye-opener. Chances are you’ve never looked at your business the same way a buyer would. Most of us are too consumed by short-term metrics and the day-to-day worries of running a business to care what an outsider would think. Forget hypothetical buyers. You need practical help you can use, now!
The reality is that taking a holistic view of your business — which a valuation will force you to do — often leads to making the right adjustments to improve or eliminate some of the most vexing issues you struggle with at your business today.
Here are some immediate benefits your business may enjoy from getting a business valuation:
Increase business value by increasing margins
I’ve been amazed over the years at how little business owners know about the margins at their business. If you don’t think margins are important, just listen to Marcus Lemonis, popular star of “The Profit” whose mantra is this: If you don’t know your numbers, you don’t know your business. Of the three numbers Lemonis insists that every business owner must know, two of them have to do with gross margins.
Even fewer business owners know how their margins compare to the averages for their industry. “How should I know?” is the slightly irritated response I typically hear.
A business valuation will take a deep dive into your Profit and Loss Statement, and can often help you identify ways to improve your margins. A valuation report will also compare your margins to benchmarks for your industry. Being able to boast better-than-average margins comes with a number of added benefits beyond a healthier P&L, including the ability to attract outside capital from lenders and investors when needed.
The connection between cash flow & business value
Everyone wants a business that “prints money.” On the flip side, if you’ve ever dealt with a cash crunch at your business, it’s a nightmare you hope never to repeat.
What we’re really talking about here is the ability of your business to generate excess cash flow on a consistent basis. In addition to helping you avoid sleepless nights, the cash flow associated with your business will be one of the main things (even THE main thing) that buyers will look at. As such, a business valuation will focus heavily on how your business generates cash, and what you can do predictably generate more of it.
In addition to increasing the overall value of your business, there a number of ways to put excess cash flow to work in the short term. You can use it to reward employees, invest in a growth opportunity, negotiate a better deal on inventory, or pay yourself a dividend.
However you use the money, figuring out what to do with excess cash flow is a good problem to have.
A business valuation will uncover risk
By looking at your business from a buyer’s point of view, a business valuation will uncover the inherent risk in your business.
“Risk? What risk?” you may be asking. Whether your business is four years old or forty, there will always be risk associated with owning it. A veteran business owner I know likes to say that entrepreneurs have a broken risk meter.
It’s not that your business doesn’t have risk: You’ve just gotten used to living with it.
One of the first areas of risk that a valuation — and a buyer — will look at is owner dependence. Your goal as a business owner is to become “operationally irrelevant.” In other words, your business runs smoothly regardless of whether or not you are physically present. A good litmus test for operational irrelevance is how long you can take a vacation without the wheels falling off at your business. Clearly, the longer the better. Aim for at least two weeks, then work your way up from there.
If you need a starting point for becoming operationally irrelevant, look at building a strong level of upper management between you and frontline employees. Another fix is to make sure processes and systems at your business are well-documented and repeatable.
A business valuation may seem like a needless hypothetical exercise — especially if you are several years away from a sale or exit. The reality is that a business valuation is often the impetus you need to make much-needed adjustments in the way you run your company, both today and for the long haul.
Less stress. More cash. Longer vacations. What’s not to like about a business valuation? Show your business a little love and have it valued today. It’s a good bet your business will love you back.