What Is Your Business Actually Worth? (Most Owners Are Surprised)

Most owners have a number in mind when they think about what their business is worth.

Sometimes it comes from the sales they’ve built. Sometimes it comes from what a competitor sold for. And sometimes it’s simply the number they hope to walk away with one day.

The question I would start with is a little different.

If somebody bought your business next month, what would still work if you weren’t there every day?

That isn’t the whole valuation, of course. But it’s where I’d begin, because a buyer isn’t just paying for last year’s profit. They’re taking responsibility for what happens after you leave.

What You Earn and What Someone Would Pay

Here’s the distinction that surprises owners.

What you earn from the business today and what someone would pay for it are two different numbers, and they can move in opposite directions.

You can earn a very good living from a company that is worth less than you think, because the earnings depend on you. You make the pricing decisions. You keep the biggest customer happy. You know which supplier to call when something goes wrong. The profit is real. It’s just attached to a person who isn’t part of the sale.

Let me give you a simple example. Assume two companies, same industry, same revenue, same profit last year. I’m keeping the numbers out of this on purpose, because the point isn’t the number.

In the first company, the owner takes a month off every summer, and nobody notices on the customer side. The procedures are written down. The team makes the day-to-day calls. The financial statements come out ten days after month-end and the owner trusts them.

In the second company, the owner has not taken more than four days off in a row in six years. Two of the biggest customers deal only with the owner. The books get caught up before tax time.

Same profit, but very different businesses to buy. The first one has earnings a buyer can expect to keep. The second one has earnings that walk out the door with the seller.

That’s the surprise. The value is in what transfers.

A Lesson From the Owner Who Wanted to Sell

A few years ago an owner came to me and asked me to help broker the sale of their business.

When I started evaluating the company, I found that it depended on the owners for the management decisions. It wasn’t the strategy. It was the daily decisions: who does what, how a problem gets handled, what gets ordered and when.

So instead of taking the engagement the way they asked for it, I told them to wait.

We spent more than a year writing out how the business actually ran, and handing those decisions to the team. Then I asked the owners to travel, for more than a month, twice, so everyone could see how the business operated without them. The team needed to know they could do it, the owners needed to know it too, and a buyer would want to see it.

While we were doing that, I noticed the business was becoming more profitable each quarter. So I encouraged them to hold off a few more months before going to market. A buyer looks at how much cash the business has produced over the most recent stretch, and a few more good quarters of that were worth more than selling a little sooner.

The most valuable thing I did for that client was not the sale. It was the year before it.

What a Buyer Is Actually Looking At

I’m not going to give you a valuation method here. A valuation is its own engagement, done by someone qualified to do it, and the method depends on the business. What I can tell you is what serious buyers check. It’s the same list whether the business is worth two hundred thousand or twenty million.

Can they trust the books? Statements must be current, reconciled, and consistent month to month. If the numbers have to be explained, the buyer discounts them.

Does the profit turn into cash? A buyer looks at what the business generates in cash after it has paid for its normal operating needs, and whether that has been steady.

One good year matters less than three dependable ones. This is also where buyers adjust earnings for costs a new owner wouldn’t carry, like one-time expenses, perks the owner runs through the business, or pay above what it would cost to hire someone to do the owner’s job. That way, the buyer sees what the business earns on its own. Those adjustments usually change the number more than the owner expects.

Does it run without the owner? Written procedures, a team that makes decisions, customers who have relationships with more than one person, and a management rhythm that doesn’t stop when the owner is out.

Three Checks You Can Run This Month

You can do this without a buyer in the picture. It takes about an afternoon.

1. Pull the last twelve months and look at operating cash flow next to net income. Is the profit turning into cash, and has it done so consistently? If the two numbers keep drifting apart, that’s the first thing a buyer will ask about.
2. Write down every business decision that cannot happen without you. Pricing, hiring, the biggest customer, approving payments. Be honest about it. That list is your owner-dependence, and every line on it is a line a buyer will discount.
3. Ask whether your financial statements, your customer relationships, and your weekly operating routine would hold up if a stranger looked at them for a day. Not perfectly. Just well enough that nothing has to be explained from memory.

Those three checks don’t tell you what the business is worth. They tell you what you’d want to fix before anyone else runs the same checks.

Why This Is a Cash Question

Last week we looked at reading your P&L like an owner, and one of the three numbers was whether profit was turning into cash. A buyer cares about exactly that, and for the same reason you should: profit that doesn’t turn into cash can’t pay the bills, the bank, or you.

But money is only one part of transferable value. The procedures, the team, and the customer relationships are a big part of the rest, along with things like equipment and the brand, and the first three take longer to build than a good quarter does.

If the cash question is the one that stopped you, the free Three-Question Monthly Review worksheet puts operating cash next to net income on one page, every month. Start there:

alinement.com/brief/tools/three-question-monthly-review

One Final Thought

You don’t have to be planning to sell to think like a buyer for an afternoon. The things that make a business worth more to someone else are the same things that make it easier to own.

I’m curious: of the three checks above, which one would you least want a buyer to run on your business today? No figures needed, just the check.

I’d welcome your thoughts.

P.S. Next week’s issue is about the cyber incident every owner should assume is coming, and what to have in place before December.

And if you’re an advisor working with owner-led businesses, visit alinement.com/advisors to learn more about the tools and resources we’re building for the advisory community.