Love Your Business TV – 12th May – How Much Is Your Business Worth
This Week’s Show
Love Your Business TV, weekly live stream show presented by Adrian Peck. The show provides free business advice, hints and tips to enable the world’s Business Owners and Entrepreneurs to work less hours, earn more money and have more fun.
In this show, we discuss how much your business is worth and how you can increase it’s value.
Transcript From Live Show
Good afternoon and welcome once again to Love Your Business TV with me, Adrian Peck. I am the founder of Better Never Stops. We deliver business advice and coaching programs to entrepreneurs and business owners around the UK and indeed across the world now to help them hopefully either fall back in love or stay in love with their businesses. So we provide business advice and support and invariably with business owners, they have been running a business for more than five years and they have started to run out of steam, run out of time and run out of love for their business. So we provide business solutions to enable them to fall back in love with their business and to start living the dream they want.
In fact, I’ve even written a book by it, it’s called How To Fall Back In Love With Your Business: The Entrepreneurs Guide To Rediscovering Your Mojo And Enjoying Every Day By Living Your Dream. So, a very warm welcome. This kind of Love Your Business TV came about two months ago now, in fact this is our 12th program before the coronavirus kind of horrible thing kicked off, but we are growing and growing every single week, which I’m very, very proud to say. We go live on Facebook and on YouTube at 3:30 every single Tuesday. You can catch up, we turn this into a podcast as well, so it goes onto Spotify, onto Apple and also go onto Google podcasts. So you can catch up and listen to us and hello to the guys down under in Australia and also in the US. I know there’s guys that are regularly are downloading those podcasts every week and listening to those as well.
Moving on to this week, a couple of weeks ago, I talked about exiting your business and I gave you various options about how you can exit. And I had quite a few questions about “That’s all well and good Adrian,` but how much is my business worth?” So this week we’re going to focus very much on to how much is your business worth, and we’re going to business valuations and what drive business valuations as well. So that’s what we’re going to do this week. So let’s crack on.
First of all, I want to give you just three examples of some stories read that I’ve come across that I personally have been involved in the last few years, really around business sales and what’s happened and where they’ve gone. So I’ve got three examples I want to take you through.
First of all, is business closes. I’ve had three emails in the last two weeks from people who are on my contact list, have regular dialogue and basically because of the coronavirus and what’s happened, they’ve kind of said, “That’s it, I’m just going to close my business. I’ve had enough type stuff.” Now, the unfortunate thing in those examples, and there’s at least three that I know of, they haven’t sold their business, they have literally just closed it, which is an absolute travesty if you think of all the years they’ve built up and they’ve probably built up quite a lot of value and actually had nothing to walk away from it. So that’s kind of the first example really of how businesses can just close and there is nothing left at the end of it.
The next one is in Ely. About four years ago now, one of my clients, we were looking to expand the areas that they were selling into, and one of the options of course is, whenever you’re expanding is to buy somebody that’s already in the vicinity. This is the beautiful city of Ely, my client expanded into Ely, so we looked at the options of purchasing a company there, and as luck have it, a broker contacted me one day saying, “There’s a business for sale that you’re looking for in Ely that fit your criteria, would you be interested in purchasing it?” So I went and started doing the due diligence basis on behalf of my client. The guy wanted just over about a £million for it, for this business, and the ironic thing is that we then met him, obviously went through a series of questions, have to start cleaning out, the kind of substance behind this business, and the accounts hadn’t been done properly. He had no idea what the sales were the previous year or the previous month, or even that month. He had no idea of what work in progress he had. He had no database of all his customers, so there was no repeat businesses stuff in there.
In the end, the business was just worthless, absolutely worthless, and this guy wanted a million pounds for it. And we just looked at it, and yes, there were some assets with the business that took that valuation down a little bit, if you like, but the hard and fast part of it, the end of it, as I sat down with my client and said, “Look, we can launch in this town, we can do all of that, we’ve done the budget in terms of launching this business and the marketing that needs to go behind it, and it’s probably a tenth, somewhere between 10 and 20%, it was 100 to 200K, that we needed absolute maximum. And that’s on a basis of a year of not doing any business. And that was the route we took. So just gives you an example of actually the real life going out and buying a business in, you know, in a real life situation and where is its value. That business was worth 200 grand to us, tops. In actual fact, I think we ended up spending about a hundred grand to launch the shop and it was up running, we’ve had four months in generating revenue. So in no way costs a million pounds, that’s for sure.
The third example of businesses that were sold. A couple that I’ve actually been involved in, in terms of actually selling them or actually buying them as well on behalf of businesses. And again, these were quite standalone, but these were two service based businesses. And all we actually done was we just brought the customer base from them, the list of customers, and there was a payback over about four or six month period. With those revenues there was a price we paid on day one, and over the three to six months as if those customers stayed with us, then there was a bonus in there for the owner.And, again, in reality, the owner got very little money for that business, but just because it wasn’t any value in it. And it just goes to show again that you’ve got to build that value into your business, that’s not just about you.
So there’s a couple of kind of real life examples, really, of how and what drives business value. But of course you want to how much is your business worth and that’s what we want to get into today.
How much would you pay for this painting? I mean, if you saw it in a car boot sale or somewhere, you probably wouldn’t think too much about it, really, and you know, to be honest, it’s not really my cup of tea, but I probably wouldn’t pay more than that £10 for it. The reality was that’s the world’s most expensive painting ever sold. It was sold in 2017 for 450.3 million dollars by Christie’s. I think it was in New York and it dates back to something like 1500, it’s one of obviously da Vinci’s paintings as well, Salvator Mundi. Now, on face value that painting’s actually not worth a lot of money, unless you actually know it and it’s something you desire as part of a collection for instance, then it has deeper and deeper value to it. But, probably wondering why I’m kind of waffling on around about paintings and da Vinci, but actually the value of a business to me is very much like art. And it’s like art and it’s like collectable cars, it’s like classic cars, it’s worth as much as anybody’s prepared to pay for it, particularly when it’s small businesses. It’s a bit different when you get into £10 million plus turnover businesses, then there are certain formulas and multiplies you can put into it, where you can come in multiple factors of how a business is then worth.
But in reality, in small business land, and businesses certainly less than half £5 million turnover, certainly less than kind of two or 3 million pound turnover. The value is really around the buyer. And it’s how what they see that value is that really kind of drives it. There is no formula. We touched on this a few weeks ago, where we looked again at exiters, at exiting your business. 80% of businesses for sale don’t sell. And that’s primarily driven because there’s a lack of preparation, there’s poor financial results, there’s over allowance on the owner and there’s unrealistic valuation. So 80% of businesses do not sell which a fairly scary statistic. But what I want to do is to just come back onto that is, so I’m not trying to dodge the question in terms of how much a business is worth. Because again, what I’m saying to you is that there is no hard and fast formula. There is no magic formula to just say, “Well, X plus X plus X, therefore there’s evaluation.”
Now there are, and I’ve seen these kind of guys that get on the phone and they will say, “Look, we can sell your business. We think it’s worth X millions of pounds or X thousands of pounds or X hundreds of thousands of pounds.”, which is a lot of the reason why these businesses don’t sell, but the reality is is that there is no magic formula that sits behind working out how much the business is valued and what that business is. It all depends on the buyer and what they see the value of that business. What I want to do is just go through some key drivers that do drive that valuation. I’m not going to sit here now and say, “Actually, if you’ve got a balance sheet that’s worth this …” you know, all of a sudden your business is worth that. It’s just really not as simple as all that. And I’m not a business broker, I’m not here to do that, but I just want to take you through actually, what are the key drivers behind it.
So the first key drivers, four key drivers I want to talk to you about here, the first key driver is the financials. So that we’re looking at the revenue, the turnover, the net profit that you make, but it’s also something a bit deeper than that. It’s also about the performance that you have over time, so how steady are those financials? Is it repeating every single year or is it up and down and stuff like that? Because again, like if you were buying that painting that I knew you still had, you spoke about it at a pub, “So look, I’ve got all those painting [inaudible 00:12:58] it’s really great, painted by that da Vinci bloke.” And you’re kind of like, ” Hmm, well really, why’ve you got it? Why have you got a $450 million painting on your hand?”
You want certainty built into that and it’s no different for a buyer, is they want to see that those financials over a period of time. So it’s not just about how high the revenues on the profits are, it’s also about the quality of the data and that performance over time as well. And that quality of data, you can go back to the business we tried to buy in Elie, he couldn’t give us any management accounts. So straight away he made it so difficult for us to buy that business. We had to walk away because we could not buy it because we could not value it. So it has to have some financials into it in order to give it a value. So it’s really, really key.
So the second one then is about growth and stability. So, what’s the future beyond today? Your buyer is not interested in the past in terms of where the business is going. He’s not interested in where it’s been, it’s more interesting where it’s going. But in the terms of financials, you want to see some stability in there and it wants to see sustained revenues and profits in there. But actually the buyer is all worried about the future. He’s not worried about the 150 year history the business might have, he’s worried about actually what’s going to happen tomorrow, what’s going to happen next month, what’s going to happen in six months time, what’s going to happen in a year. So what are the growth plans that are in place, how sustainable is that business, what marketing sales strategy have you got in there that’s going to grow and have that business sustainable for a few years?
Bearing in mind that an investor or a buyer is going to buy in that business, I want to return an investment over a period of time and obviously the faster they can get that return back, then the higher the value you will have at your business. So, the third one is cash. Now, this is a little bit odd because there’s two paths really to it, the business has to buy in terms of buying a business. First of all it’s going to give you some money for your business. Your business you’ve built up, it has a value into it, it’s good willing and what it’s going to return over the next few years. It has that value to it, which is one kind of paycheck, if you like.
The second part to it is what the working capital that needs to be involved in it as well, and what cash needs to be in the business for it to be stained. In essence, they’ve got to write two checks, but those two checks are going to come from the same check book. Therefore, if you’ve got a business that needs a lot cash to fund it every single day, because it’s got a big debtors list and therefore it needs a lot of cash to fund it, the value of that business is going to go down, because your buyer’s only got one checkbook. I come across with a lot of engineering businesses as well, a lot of engineering and manufacturing businesses, that they have a high degree of plant and equipment. So if you imagine you’ve got a million pounds worth of plant and equipment, and let’s say you’re netting two or 3% from a … you’re turning over two and a half million, 3 million pounds of business, 3 million pound turnover business, and you’re generating 200,000 pounds worth of net profit per year. If I’ve got to go in and buy that business and spend a million pounds to buy all the assets of the business, 300,000 pounds a year return on that, by the time I’ve paid myself and took whatever risks, is not that appealing to me. And that’s just buying the assets of the business without the good will and the cash that’s involved in it.
That’s why at times it’s really, really difficult to sell these kind of manufacturing businesses, particularly where they’ve gone down a rabbit hole and they haven’t expanded and got their strategies right in their business. Because invariably the valuation of business is going backwards every single day that those assets sit on that balance sheet. So the idea is really, really to get the asset sheet down and you need to get the cash collection into it as fast as possible, because there is only one checkbook. So that’s a really, really important part and important factor that drives those valuations for those businesses.
And the fourth one, and not surprisingly and quite important one, is you. There’s a great saying about, “You can take away the balls, but you can’t take away the juggler.” If you are the juggler in your business, as soon as we take you out, the balls are going to fall on the floor. So you can’t be the juggler, you’ve got to build a business that’s not about you, and you’ve got to take yourself further and further out of that business so it literally runs on its own without you being in it. And the kind of great test to it is go on holiday for three months. Go on holiday for three months and see if the business can carry on running. If it can’t, you’ve got a problem, and you’ve got another problem with your valuation at the end of the day as well. Because the buyers will come in and say, “Well, okay, if we take John out of this business, what’s it going to be worth?” Well, actually, John does everything. He’s talking to customers, he’s talking to suppliers, he’s making the day-to-day decisions, that becomes really unsustainable.
So there’s the kind of really four key valuation factors that drive the value of your business. Your financials, making sure you’ve got good revenues and profits over a sustained period, that you’ve got good quality data and you’ve got the background and performance. You’ve got growth and stability in your business, so they’re buying some certainty about the return on that investment over a period of time. It’s as cash lean as possible, which is really, really important. And of course, it’s not reliant on you. And they are the four key parts of that.
So hopefully that’s really helped you. Obviously there’s some more stuff in my book. In chapter one we talked about strategies and more stuff in there about the exits and getting the valuation of business. But in reality, the whole of my book is really there to drive up the value of your business. If you follow everything I say to you, you’ll get there as well. The last thing is I’ve got a free business health check that you can take. So it’s peckuk.scoreapp.com. Peckuk.scoreapp.com, and you can get a free in-depth business health check. It will look at every single aspect of your business and give you a quality or a health score against each one of those parts of it. And as it overall, there’s a 20 page report that comes off the back of it. So please, go and take that report. At the end of it as well, you can have a free consultation with myself to get some more in-depth help and advice in it. In the report there’s at least 35 different strategies in there for you as well that come out of it to help you grow your business and increase that value.
So I hope that’s been a really good help. Again, please give me some feedback of how you found this week. Next week we’re talking about Big changes will Kill Business Growth. So it’s the aspect I’m looking at next week, Big Changes Kill Business Growth. And thank you very much, stay safe as always, and remember we’re back on next week at half past three on Love Your Business TV. Thank you, Darren. Thank you also, Andy, thanks for those guys, thanks for your comments. And I look forward to catching up with you next week. Thank you very much.
And remember…Better Never Stops