Business Valuations Pose 3 Risks for us Cheapskates
What’s My Business Worth?
When I owned my first business I asked that question all the time. What’s it worth? If I stopped doing this today how much money could I stick in my pocket?
It’s tempting to try to impress you here by listing some different business valuation methods. Throwing the names and formulas at you might make you think I’m a valuation expert (I’m not), and more dangerously, it might make you think reading those formulas means you understand the value of your business (you don’t).
While I believe there can be substantial value in a professional business valuation, I’ve always been too cheap to get a real valuation of any of the small businesses I’ve owned (unless forced to do so by a bank). So my first problem with business valuations is that I never actually get one. I made due with the research I did myself.
And that’s why I believe that for the average, cheapskate, small business owner there is great danger in the whole concept of business valuation.
Why is it dangerous?
It’s Not Meant for You
The content you see online around valuation is targeted to businesses larger than yours – at least for most small business owners. Over 90% of businesses in the US fall into one of these two categories:
- They are “non-employers” (meaning they have no employees other than the owner).
- They earn less than $500,000 in revenue.
So, most of us own small – actually very small – businesses. And the truth is you almost never see information written or directed at valuing a “very small” business. The examples your read about, and the conclusions drawn from those examples, are almost always about bigger businesses. And let’s admit we’re on dangerous ground when we start to plan our financial future based on the multiple of earnings paid for the latest, humongous internet acquisition.
Our small business size is also the reason that most of us don’t get an actual valuation. If our business is worth $45,000, is it really worth $3,000 to get that value established?
We Jump to Conclusions
Even if your business isn’t on the “very small” side, it’s still too easy to misapply what you read about business valuation. That’s what happened to me with my first business.
I remember reading the article that said that a business in my industry would sell for 1-2 times annual revenue. We were doing around $3 million in revenue at the time. I did the math and figured if I was able to get the business to $5 million in revenue I was going to sell – I mean, even if we were at the low, 1x revenue end of the range, $5 million was going to buy me out of my misery with the business. So, for the next two years we worked, and grew, and got to that $5 million-dollar revenue level. Then we decided to explore a sale.
That’s when I found out that revenue was meaningless when it came to the value of my business. I was doing $5 Million in revenue and found out my businesses was essentially unsellable for even a fraction of what the article said.
I pursued real business strategy because of a casual reading of an article about business valuation. I wanted what the article said to be true. It’s too easy to jump to conclusions. even when the information doesn’t really apply to you.
We Equate our Imagined Value with Ability to Sell
So, we acquire incomplete knowledge, not designed for a business our size, and then we come to faulty conclusions. Most dangerous though is that we then equate “business value” with actually being able to sell our business for that price.
Different methods to value a business are not the problem. “Rules of thumb” that are used to estimate the value of a business are not the problem. Articles that talk about these things are not the problem – here’s the problem:
- We believe our ability to sell our small business is based in something other than our potential buyer’s realities.
- We believe that years in business, customer satisfaction, growth, revenue or some other business metric creates inherent value in our business.
- We believe that value we can sell comes from some secret formula, not the results that our business generates.
Your ability to sell your small business is not based in a secret value formula that mysteriously exists in the spreadsheet of a valuation specialist.
Your results buy your business – that’s true even if you’re a cheapskate like me.