What's My Business Worth?
By Susan Schreter - Take Command

Q.  I created a film marketing business 24 years ago. How should I value my business? I have 5 employees, but I'm responsible for bringing in new clients and making sure they are happy. I want to sell the business in the next few years. What can I do to get a high sales price?

A.  Valuing a privately-held business. Gosh, I wish I had a dollar for every entrepreneur and business owner who's asked me for a specific formula. The fact is there is none that works for all service or manufacturing companies.

After 24 years in business – a fine accomplishment by the way – it's useful for you to know what factors business buyers will use to measure your company's worth. Your business is as much a financial asset as the money in your savings account. Knowing your company's current market value can help you plan for retirement or give you options if you ever want a career change.

To gain a better appreciation of how businesses are valued, let's first look at who buys businesses. Afterall, it is the buyers that give tangible meaning to valuation discussions.

In general, there are two types of business buyers: financial buyers and strategic buyers. A financial buyer, like a private individual investor or buy-out fund, only buys businesses for a healthy return on investment. This buyer is a number cruncher and evaluates ways to improve a company's revenue and earnings so that one day the business can be flipped to yet another buyer for a profit or go public.

Financial buyers also look to the overall size of a market to confirm there is room for business growth. If for example, you have already secured 70% or higher of the independent film marketing business in the US, this achievement may dampen buyer enthusiasm because of limited perceived upside within your market.

Strategic or corporate buyers buy businesses not only for profits but for other operating benefits as well. These buyers acquire companies that will boost their overall market share, technical know-how or production capacity. Sometimes money-losing companies can receive a premium valuation if they have a desirable location, patents or contracts that can be leveraged in new revenue-generating ways.

In your industry it is common for well-established, niche-oriented public relations firms to be acquired by larger advertising agencies. Why? Simply because the advertising agency would like to reach out to the PR firm's client base to sell other advertising, market research or consulting services. Some corporate types call this "synergy."

Just as much as business buyers pay attention to the upside of an acquisition, they also guard against the downside. They don't want to buy a business in which revenues plunge after purchase, just because the founder is no longer involved.

Unless the founder offers difficult-to-replace creative or technical talent and agrees to continue working for a company after purchase, small business owners benefit by adopting a counter-intuitive approach to business building.

What do I mean by this? Successful entrepreneurship is all about the business, not the founder or the founder's pride.

Granted, most businesses start out as solo enterprises, but with each passing year of operations, owners should strive to organize a company that does not require them to be the creative and sales generating nucleus. At the time of business sale, the top performing asset of the business should not be the founder! Here is the secret to business selling success. Again, its about the business's accomplishments not the founder's accomplishments.

Unfortunately, this is probably your position today in the film marketing industry, especially since your name is on the company door. The good news is you can take steps to alter this perception. Here are some ideas:

  • Reposition marketing and sales communications to emphasize the reputation of the firm rather than you as the sole owner and lead revenue generator.
  • If possible, seek longer-term "assignable" customer contracts that can be picked up by a new buyer without the founder's involvement.
  • Teach employees to pursue new revenue generating opportunities to compliment the business owner's contribution. Everyone wins when employees are empowered to become business builders too.
  • Consider opportunities to build proprietary customer lists, subscription-based services, products that bear the firm's name or logo, or other services to existing customers. Be creative. Brainstorm ways to distribute professional know-how through multiple communications formats too.
  • Research opportunities to partner with other larger firms to develop new products or services or move into international markets. Take steps to diversify revenue generating sources and partnerships.

I do appreciate that these solutions don't just appear magically. It takes time, careful consideration and ongoing discipline. One or two new initiatives to reduce business founder dependence should be included in every young company's annual business planning.

Now back to your question about your company's value today. Professional business appraisers of service businesses largely rely upon recent acquisition activity for valuation guidance. It's not an exact science, but to the extent this information is available from public or private sources, the appraiser would look at the price paid recently for "comparable" companies. Often this number would be presented as a multiple of the acquired company's revenues or operating income (cash flow before interest and taxes). If for example, a company with $1 million in annual revenues was bought for $2 million, then the acquirer paid 2 times revenues. This multiple of 2 would then be applied to your company's revenues to estimate your company's value.

So what's your number? If it is not as high as you hope, remember that just because your company is not marked with a high price tag, you probably get tremendous satisfaction from being the boss of your own creative endeavor. You just can't put a value on entrepreneurial happiness. It's priceless.

Take Command Action Step

Every year, compare your company's year-end gross profit and operating income to other national industry competitors. Buyers tend to pay more for industry-leading profitability. If profitability at other firms is consistently higher than at your own, look for productive ways to improve your company's operations without jeopardizing service quality. If your company's profitability exceeds the industry average, then strategic buyers will likely pay a premium to own your business. That's the golden goal of entrepreneurship. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org