Show notes
To increase the value of your business, consider this: 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.
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. And once again, you hit me with another term where I'm like, 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.
I mean, when I was thinking about the topic, the value of your business, meaning what would it be worth to someone else if they wanted to buy it from you? And what that means for a business owner is what someone would actually pay for the business. What it means for a salesperson is 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. And 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? And they 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.
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?
And Glen Holt, who was a professional in the promotional products industry for a long time, one of my mentors in the early days, I remember he was talking about that when people are looking to buy a business, really what they're paying for is the likelihood of future business. Because the only way I'm going to 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 10 years, whatever that multiple ends up being. So that at some point I know that I'm going to be able to recoup my investment and then 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 and, a lot of parents find out their kids don't want the business, and 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." And so I think always running your business in a way that if you had to sell you, 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, and 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. And 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," and 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? Am I going to have 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. 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,