Know The Value of Your Business

We, as well as our businesses, are all different. We are at different points of our lives and our respective businesses are at different stages of business life cycle. We all, however, have one thing in common. At some stage of our lives we will look to retire. Some of us will retire sooner than others, of course depending on how well the business is doing as well as how long we intend to stay in business, what we want to do with it and, if we sell it, how much we will get for it.

Look ahead to the time when you are planning to retire. What would you do? How much would you like to retire on? What would be your ideal lifestyle?

But firstly, what is the purpose of YOUR BUSINESS? If you only see it as a job and all you look forward to is a nice little bungalow in Great Yarmouth, then I suggest you click on the red cross at the top right-hand corner of your screen.

If, by contrast, you aspire to a yacht and a villa on the French Riviera and consider your business to be the principle contributor to your pension pot, then read on. This article is for you!

Previously people paid into a pension fund from the ages of 20 to 65, and average life expectancy was 70, so 45 years' contributions had to pay for 5 years retirement (on average). Now, few people pay more than (say) ages 25 - 55 in contributions (everyone has ambitions to retire early) but are living to nearer 85: 30 years contributions for 30 years of retirement - just will not compute.

If you are a Sole Trader, the only value in your business is your customer base, maybe some stock and some goodwill. However, given that your customers are likely to be your customers because of you and the service you provide to them, then I'd guess a bungalow in Yarmouth it will be as you are unlikely to get a huge sum of money for that. As one of my friends says, "In pension terms, a phrase 'diddly squat' springs to mind".

However, if you have staff to help you deliver products or services, then there is a good chance you could build something of real and substantial value.

I like watching Dragons' Den (if you haven't watched it, I suggest you tune in). It is great to see so many entrepreneurs trying to expand their businesses. However, how many times are they asked about how much their business is worth and what they estimate it to be in 1, 2, 3... 5 years' time? More importantly, how many of those business people can give an accurate valuation and reasons for it? It is amazing how many people under, but more often overestimate the value of their business! You would have thought that after years of this programme being on air, people would have learnt and got their businesses valued professionally if they can't do it themselves (which they clearly can't).

Let me ask you this:

• Do you know how much your house is worth right now and why?

• Now, do you know how much your business is worth right now to a willing buyer in a commercial and competitive market? What do you base this on?

Now, ask yourself: is this going to be enough to retire on and how long will you last on that money?

The good old times when it wasn't unusual to receive offers of 10 times or more the value of your business are gone. Business owners would be lucky to get 3-5 times now (if at all). This depends on what you project your business earnings to be in the next 2-3 years (assuming you have those projections and can justify them in some way, shape or form). It also depends on the sector you are in, current market sentiment and succession management.

If your business heavily depends on you, then it is worth next to nothing. However, if it operates efficiently without the business owner needing to be in it, the value could be substantially more! Operational independence is the key to that. How do you achieve it? There are a number of areas to consider and I will be happy to talk to you about that when you contact me.

Assuming that your business is growing, profitable and sustainable. At what stage would you want to exit and why? What price would you accept for it and is it realistic? In order to answer that question, you would need to weigh your expectations against the market reality.

Use an expert to assist you with such BUSINESS VALUATION so that you know what you could get for it. Equally, you would rely on a valuation when you look to attract investors. If you are looking to acquire a business, you would want it valued to ensure that the asking price is fair.