In the early stages of most businesses it is all about growing the business, getting it to a sustainable level and then building the profits. Sooner or later, though, you will ask yourself the question – what is my business worth?
Business owners should always have a sense of their business value. Every business will be disposed of, one day. The reality is that some don’t make it, others may be passed through the family, but the majority will be sold. Some people think that selling the business is a retirement issue.
Whilst this sometimes is the trigger, there are far more businesses that will be sold simply because the owners are either ready to move on to the next challenge or know that they are not the right people to take the business through its next stage of development.
Owning the one business for all of your working life is less common. So, if you are going to sell one day, then it makes sense to be building the business for sale every day.
Knowing what your business is worth is part of this. Business value will normally be measured by either its level of profitability, a value model specific to your industry or, in a very limited number of cases, a value attached because of the future potential of your business. Let’s take a look at these.
Some industries have a specific industry valuation model. Typically these occur where there are a large number of participants.
Think about an industry or sector where you have a large number of similar type businesses and where the business model is reasonably consistent. Businesses like newsagents, pharmacies, cafes, real estate agents are examples of these businesses, and there are many more.
The good thing about these businesses is that value is relatively predictable.
The downside is that unless you have an exceptional business you will fall within the industry norms for value.
If your business is a bit more unique or in a segment where there are not a large number of similar businesses (and when we talk about a large number, read this to mean thousands of similar businesses in Australia) then value will most likely be driven by the value of the assets in the business and your level of profitability.
If you are not making any real profit after owners’ remuneration then your value will be limited. This is another reason to make your business as profitable as possible.
The other possibility is that you have a very unique business where the value is yet to be realised but you have put in place the structure or hold the intellectual property that will allow significant profits to be produced in the future.
In some cases this type of business may even have a history of trading losses, yet may still be very valuable. Don’t take this to mean that all loss-making businesses are valuable. They are not. We are talking about very unique businesses that have specialised intellectual property that will commercialise in the future.
The key is to understand your business model and where value should be in your business. You may want to check this value from time to time. And you certainly want to keep growing it. One day you will likely sell your business.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.