Updated: Aug 19, 2021
If you ask most business owners what drives the value of the business, most will tell you first and foremost is financial performance. Financial performance is important but is only one of several variables that affect the value of your business. When it comes time to sell your business down the road, there is much more to it than just having steady revenue and a good profit margin.
Most businesses worry about the value of their business when they are ready to sell their business. Unfortunately, at that point, it is way too late to make any changes. Instead, if you focus on the areas that drive your business value early on in your business, you have a better chance of receiving the value and earnings multiples you want for your business down the road.
Other factors will affect your business value and the multiplier of what you will eventually receive for your business that many business owners do not consider. To change any of these, it will take time, so you must look at them early on within your business, so you are running your business so that if you had to sell it tomorrow, you would receive the value you deserve.
Dependence on the Business Owner
We always ask business owners how involved they are in the everyday running of the business, including sales with clients. In some cases, the business owner will smile and tell us how they know their clients by name and ask for them. In addition, they will tell us how the clients will come to them anytime they have a problem. Then there are business owners who tell you how they really can't afford to take a vacation, as the business would not continue to run.
Unfortunately, both of these are a problem because if the business revolves around the business owner, this dramatically reduces your business's value. The company is not worth anything without you in it. Owner over-involvement also decreases the chances of someone down the road buying the business. In most cases where the business owner is too ingrained in the business, there are no documented processes and procedures, so the business cannot manage without them. In most cases, everything usually resides in the business owner's head, so it is not a business that could easily transition. This affects the value and is why most service-driven businesses do not obtain the same value and have a lower earnings multiplier versus product-driven businesses.