Show notes
To grow the value of your business, consider this. If your business burns down, you’ve got whatever… desks, furniture and things like that. That stuff’s all insured. You should be able to come back from that okay.
But if your book of business burns down, right? If you still have all this overhead, but you don’t have that book of business anymore, you are really in trouble. Because if you have desks, and furniture, and technology but you don’t have the ability to sell to the people that you need to sell to, what’s that really worth? All of that is just overhead.
David: Hi, and welcome to the podcast. In today’s episode, co-host Jay McFarland, and I will be discussing building the value of your business. Welcome back Jay.
Jay: Hey, I’m so glad to be here, David. Once again, you hit me with another term, Do I really know what the value of my business is? And value has such a different meaning for so many, right?
Value could be. Well, it gives me free time. I hate my business, but it gives me free time. So it’s of great value. Or it’s of great value because I have all these shiny toys, you know, those types of things. So I think value could be very different for different people.
David: Yeah, it absolutely can. Particularly when we’re thinking about business owners versus salespeople.
When I think about business value, I mean what is it worth to someone else if they wanted to buy it from you. For a business owner, what would someone actually pay for the business? For a salesperson, what is your book of business worth?
If you’re building something up and somebody wanted to buy your book of business, what would that be worth? That’s what I was thinking of in terms of value. But you touched on a lot of other great points regarding the term.
Jay: Yeah, like I said, there’s so many other things. I’ve talked to people who have said, yeah, I’m thinking about selling my business.
And I ask them, well, what’s it worth? They often look at me like I have no idea whatsoever. In fact, I was working for Kinko’s way back when, when they wanted to sell. And they wanted to go public first, and the SEC came in and said, you don’t know what you own. You don’t know what you owe. You don’t know anything about your business.
And you have the worst paperwork system we’ve ever seen in our lives. You’re not going public. And so they went and found a private buyer, which was FedEx, who went and bought FedEx Kinko’s. So just in how you manage your business can affect the value of that business.
David: Yeah, absolutely. And for a lot of people, the value of their business isn’t going to be FedEx Kinko’s worthy, very likely.
Jay: Yeah.
David: But still, it’s good to know. And, for some it might be worth more than that. But for most people, particularly small to medium sized businesses, when they’re looking to sell, they really don’t have any idea of what the business is worth or what it could be worth to someone else. And in different industries, there are different metrics and multipliers that people use.
They say, okay, well, we’re going to take a multiple of your net value. In other words, what is, bottom line, after owner’s compensation and things like that. They have a number of different metrics that people use. But in a lot of cases, that’s what it boils down to. What’s it likely to be worth to someone else?
Glen Holt was a professional in the promotional products industry for a long time. He was one of my mentors in the early days. I remember him saying that when people are looking to buy a business, what they’re really paying for is the likelihood of future business. Because the only way I want to spend a dime on a business is if I know it’s going to generate a high multiple of that over a period of time. Whether it’s two years or five years, or seven years or ten years, whatever that multiple ends up being. At some point I know that I’m going to be able to recoup my investment and make more going forward.
Jay: Yeah, exactly. Maybe you envision running this business forever and then you hand it off to your kids and their kids. But a lot of parents find out their kids don’t want the business. So it’s not easy to offload it that way.
But I like the idea of even if you’re never considering running your business, things happen. Right? Medical things happen. Emergencies happen. You may find yourself someday saying, “I don’t want to sell. But I have to sell because of my circumstances.” So I think always running your business in a way that if you had to sell, you’d have your numbers in line.
You’ve built your value, you have a clientele. I think that may be just a good mindset.
David: Yeah. It’s also a good mindset if you think about the fact that some people don’t want to sell their businesses. That’s perfectly fine. But the thing that you have to realize is that if you don’t sell your business, then who bought it? You did, right?
Jay: Yeah, yeah, yeah.
David: You bought it with your time, your energy, your effort, all the hours that you put into it. So it’s good to be able to say, “okay, I know what I’ve put into this.” If you even get a value of what it might be worth to someone else, you can say, “would I be willing to pay that for this business?”
Right? Or the amount of time and energy and effort that I put in, would I want it to be worth more than that? So I think it’s a good metric to know from our own standpoint in terms of what’s the business worth or what’s the book of business worth to someone else. But also how am I doing in terms of what I was hoping to build when I started out?
Jay: Yeah, that’s a good question. What were you expecting to build and where are you now and what more can you do? I think there’s also some sticker shock when you think your business is worth one thing and someone comes in and says, “oh, I think it’s worth half that.” You’re like, “wait a minute, this is my baby! I built this thing. It has to be worth more than that.”
David: Right, but there are metrics that you can use to make those determinations. And chances are, if you go to sell your business, somebody’s going to tell you they think it’s worth less than you do. But that’s where you have to make a determination as well and say, “okay, well look, if you were to buy this business, in three and a half years, you would be able to get your money back even if you just maintain it,” right?
So, and if they say, “well, I only want to pay, you know, a year’s worth,” then you can say, “all right, well we probably don’t have a fit here,” or whatever. But as long as you’ve got the metrics to back it up, to say, okay, we’re doing this amount of sales after our costs, we’re doing this amount. If you take out what the owner’s being compensated, then this is what you would have left at the end of each year.
And then you use that as some sort of multiple to say. Is it two years? Is it three years? Three and a half, five, seven, whatever you can get. Now, there are some companies, particularly in the tech space, and particularly if they’re recurring revenue companies, that they can sell for high multiples of what they’re bringing in each year.
It just depends on what people feel that it’s worth and also, what they think they’ll be able to do with it. Because if somebody has a book of business and they’re selling whatever, a quarter million, half a million dollars a year, I’m talking about a salesperson and they want to retire. If they were to sell their book of business to someone else, and that person was going to look at it and say, well, I think I can probably maintain that for a certain number of years.
Then they would value it based on that. If they looked at it and said, I think I can do twice what this guy’s doing with this book of business, then they might value it higher.
Jay: Mm-hmm.
David: So a lot of it has to do with the person that you are looking to potentially sell to as well.
Jay: Yeah, absolutely. And I also think just some of the more simpler things like staffing, you know, who’s running the place when you’re not there?
What does the place look like? Is the equipment updated? Because, you know, that’s what I’m thinking. Am I going to have to come in here and update all of this equipment? Will I have ongoing capital costs? Am I going to have all of these things? You may think you’re saving a dollar now, but if you do have to sell, it’s really going to hurt yourself in the long run.
David: Yeah, and we didn’t even really talk about things like that because it depends on the kind of business that you have.
Jay: Mm-hmm.
David: If you’ve got a lot of overhead, if you’ve got furniture, fixtures, real estate, all those types of things, those are all going to play into it. I was really thinking more in terms of small businesses or a book of business that a salesperson has, where it’s primarily their book of business that they’re selling. Because in those situations, when people buy businesses too, they very often prefer to do an asset sale.
They only want to buy assets of the business so that if there were any potential issues with the business before, if somebody was going to try to sue the business or whatever, that wouldn’t potentially come with a sale. So they’d say, “I just want to buy certain assets. I want to buy your customer base. Maybe I want to buy certain furniture and fixtures. I want to take along certain employees.”
So they can sort of cherry pick the things that they want to buy from the business. But I don’t want to get too much into the weeds on this. I think for anyone who has been considering the idea of, okay, what is my business or my book of business worth? What do I need to look at?
And so some of it would be to say, okay, what type of clients do I have? Do I have a base of high value clients? People who spend money with me consistently? Because if I do, that’s going to be worth a whole lot more than if I’m getting one-off and two off orders from lots of different people, and it’s coming from all kinds of different sources and I can’t say where it’s coming from.
Jay: Right.
David: When you know where your clients are coming from and you’re selling to them on an ongoing basis and you’ve got a lot of repeat and referral business, that’s a whole lot easier to sell.
Jay: Yeah, absolutely. In fact, you know, I’m just going through this process right now. I am basically starting a company that is mirroring the company I work for, because they’re going out of business, and I was able to cherry pick the things that I liked, so,
David: mm-hmm.
Jay: Yes, give me your customer base. Yes, give me some of your systems with your website and things like that. Throw the rest away. I don’t want any of the other stuff because I didn’t feel like they were doing it right. So I really came away, like you said, with this book of business that I know is going to be of high value and high dollar for me.
David: Yeah. And what a lot of people lose sight of sometimes is that that is really the primary value of a business. There are a lot of people in the print and promotions industry where they’ve got printing equipment and they’ve got all that sort of thing, inks and all sorts of things like that, which for the most part reflects overhead.
That stuff that you’ve got to pay for, that then has to be paid back. And all of that’s going to be paid back by the customers that you’re able to bring in. So it’s all going to be dependent upon the business that’s coming in. So a lot of times the things that some business owners and also most banks, the thing that most banks look at as assets are to most business owners, actually liabilities because it’s overhead.
And I’ve, said this a number of times when I’ve been speaking in public about this. One of the things that I’ve said very often is the fact that If your business burns down, you don’t want that to happen, right? But if your business burns down and you’ve got whatever, desks and furniture and things like that, that stuff’s all insured. You should be able to come back from that okay.
But if your book of business burns down, right? If you still have all this overhead, but you don’t have that book of business anymore, you are really in trouble. Because if you’ve got desks and you’ve got furniture, and you’ve got technology and everything, and you don’t have the ability to sell to the people that you need to sell to, at that point, what’s that really worth?
All of that becomes overhead. So it’s just good to think about.
Jay: Well, and I also think, and I don’t know if this is on topic, with what you’re thinking of, but it really pops in my mind, is if you have different salespeople in your business and their book of business is treated as their book of business, if they leave, you’ve lost a portion of your clientele. And so it’s very important to somehow incorporate that into a customer management system where you can see everything that’s been going on, maybe have non-competes. Because in the situation I was in, I attained a certain level of knowledge that no one else in the company had.
And so when I went to leave, they’re like, “we’re going to have to shut down because he is the only guy who knows this stuff.” And so offloading their information, offloading their customer base, making sure that it’s treated as your property if you do have a sales team, I think is absolutely critical.
David: Yeah, absolutely is. In the promotional products industry in particular, a lot of businesses hire independent contractors. And when you’re an independent contractor, unless there are documents that say something different, you pretty much own that book of business.
Jay: Yeah.
David: If you’re an employee, if you’re a paid salesperson, if you’re on salary, then it’s very likely that the company owns that book of business, unless there’s some sort of documentation saying otherwise.
So regardless of however you’re set up, it’s really smart to have some sort of clarification upfront when you join an organization. Okay, who owns these clients? Is it the salesperson? Is it the business? Because if you’re unclear on that stuff, that could lead to expensive legal issues down the line.
Jay: Yeah. One person could walk out the door and that’s it. Then you’re rebuilding from scratch.
David: Yeah, we have a manual system, that a number of businesses in the print and promotional products industry have used. And when we were promoting that at one point, one of the points that I made with that particular product was that if someone were to walk out of a bank with $250,000 that didn’t belong to them, that would be called bank robbery. It would be a crime.
Jay: Yeah. Yeah.
David: And they would send the police after you. But if a sales representative walks out of your business with $250,000 worth of business, if you don’t have the paperwork in place, there’s no crime there, right?
Jay: Nope.
David: You just lost it, and that person has it.
Jay: That’s right.
David: So you really want to make sure that stuff is nailed down in advance.
Jay: Absolutely. I love this discussion. How can people find out more?
David: Well, you can go to TopSecrets.com/call to schedule a call with myself or my team. If you’re thinking about building up the value of your business, one of the best ways to do that is to have the systems and processes in place that will allow you to be able to sell it, move away from it, and have the person who buys it be able to expect to continue to grow that business and obtain a high return on investment. That’s what’s going to allow you to sell it for top dollar. If you don’t have systems and processes like that in place, it’d be great to have a conversation.
Jay: Yeah, absolutely. David, once again, it’s always a pleasure.
David: Thank you very much, Jay.
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