Understanding how businesses are valued is a core financial skill for an entrepreneur!
An entrepreneur who does not know how to value a business reminds me of a guy who works hard all week, then leaves his wallet on a bar table! Two weeks ago, a friend of mine listed his company on the NASDAQ:
1. It had not a single asset. Nothing! No buildings, no cars, no houses…
2. It makes less than $600m revenue, and $40m net profit.
I thought he was going to get about $15bn!
Why? The GROWTH RATE!!!
It’s your job to know why, and bring yourself to a full understanding. There are many methods of business valuation. You all have to do your homework here. I can’t do it for you on a blog post.
About five years ago, I wrote a series here on the platform called “Buying and selling businesses, is also a business”. In that series I wrote that whether you’re buying a business for the first time, or you are a giant multinational buying a business, the same questions always apply:
1. What is your motive behind your decision to buy a business?
2. What will you do with it, to grow and expand it, once you’ve acquired it?
3. Do you have the capacity to run and develop the business you’re preparing to buy?
4. What will you pay for it and how did you reach that price?
5. How are you going to pay for it?
6. What are the challenges and risks outside your control?
Don’t look at someone’s reason for selling their business as a negative thing, I wrote in a comment to Jezreel back in 2016. Buying and selling of businesses is going on all the time. It is part of good business. It is rather like buying and selling players in soccer — it’s part of the game.
I introduced this topic because I realized that many young entrepreneurs don’t always appreciate this fact of business.
Companies like Microsoft and Google are buying scores of companies every year, and those who sell to them are very excited to sell them, too. It’s business, and it’s good!
When you are asking yourself “What is my business really worth?” you need to know that appraising the market value of a business is also a business and can be complicated.
To help you price your company correctly [depending on its size], try to hire the best professional valuation expert you can afford. You might “believe” your business is worth X, partially based on emotion, but you could be very wrong – either on the high side or the low side. Like I said back then and as true today, especially for the #JuniorClass:
__Pay attention because you may never have been this way before.
# Be ready to answer lots of questions [with facts and data] and always remember – honesty is the best policy. No one expects to be buying a perfect business!
# Make sure all your financial records [and all your legal documents] are in order. Most buyers want to see [and verify] revenues and profits. If you can, have available at least three years of financial information. Audited statements are best.
Whatever you do, don’t get excitable and sell yourself [or your business] short. Your professionalism and confidence can make all the difference between a win-win business deal and daylight robbery.
Image credit: Neil Agate Photography, Serengeti, Tanzania. @africansafariconservation