Small Business Valuation Made Easy!

Business valuation can seem complicated. A couple of relatively simple methods will get you on the right track for what you need.

Are you considering selling your small business? Are you looking for financing for your small business? Are you creating a will or your succession plan? If you answered yes to any of those questions then you need to know the value of your business first.

There are many ways to create a valuation and each method may give you a different answer. This is actually a good thing because you may end up with a range of values. Depending on your purpose, this can provide you with a lot of guidance. For example, if you are planning on selling, then having a range might give you your starting asking price but also guide you to the lowest amount you would be willing to accept to complete the deal. There isn’t going to be a 100% accurate answer; at the end of the process, your business is only worth what someone else will pay for it. Here are two common ways to objectively value a small- or medium-sized business.

The first method is calculating a multiple of earnings. Essentially this method requires you to take the normalized net income of your business and apply a multiple to get to the value. First, to normalize your net income you have to add back all of the deductions you have made to lower your taxable income that were not part of the operation of the business, or are expenses that a new owner would reasonably not expect to incur. Some examples may be your personal salary, or expenses for a vehicle, your cell phone or extra meetings held at nice restaurants. Look closely at the potential list of items you want to remove. The more you can legitimately add back, the greater the increase will be to the value of your business.  Don’t forget though, what you add back must be reasonable because you will be expected to defend the adjustments to a potential buyer. Once you have normalized your net income, try to determine what multiple of that number would be typical in your industry.  There will be a range here as well with no definitive answer. Try checking with a business broker, looking online or at others within your industry. Many industries, especially those that are service related, may fall in the 2.5 to 3.5 times net earnings range. For example, if your normalized net income comes out to $80,000, these multiples would show a valuation range of $200,000 to $280,000. A flaw in this method is that an underperforming business may be significantly undervalued by a net income that doesn’t truly reflect the opportunity of the business. That is the potential gap.

The second method is calculating a multiple of sales. This method is quite simple: determine the sales multiple that would be typical within your industry and apply that to your gross sales. Use the same suggestions above to try to determine the multiple. Let’s assume the typical range for your industry is 0.75x to 1.25x sales. To continue the example, if your sales are $300,000, then you would get an expected valuation of between $225,000 and $375,000.

You can now see that the two different methods give two very different answers. It is noteworthy that if there is no overlap between the values you get using these two different methods, and in fact there is a significant gap between the two ranges, it could indicate an issue with the overall health and performance of the business. For example, it could reveal that your net income is relatively low compared to what the valuation would expect. This gap could influence the buyer’s decision. A flaw in the multiple-of-sales valuation method is that ultimately a buyer wants to know what his or her return on investment will be – what can they expect to make with this business relative to what they have to spend to get it. That’s why the income-multiple method is more valuable on its own, but the two methods together are even more useful.

When you combine the two ranges together, you arrive at an estimated range of between $225,000 and $280,000. After you’ve establish an estimated range, your next steps will be determined by the purpose of your valuation. If your intent is to sell the business, you will need to justify the gap between what you think the business is worth (top of the range) and what you might expect someone else to value it at if they were to offer to buy it (bottom of the range). Consider some of the following aspects that will improve your multiple:

  • Growing market share
  • Sales increasing over time
  • In a growth industry
  • Ease of entry
  • Availability of opportunity
  • Tenure of staff
  • Training and support for new ownership

Any of these factors will improve the valuation. You can use these points as leverage to help justify a higher selling price.

Valuing a business can be a very subjective process.  I have only outlined a couple of methods and ideas to give you a framework. If you are thinking of buying or selling, it’s important to look at the business as an investment – what will be the return on the investment? What is the opportunity cost compared to another investment? From there you can add or subtract any other emotional or qualitative judgement.  Always be prepared to negotiate and defend your principles.

Please feel free to leave any comments or questions below.

Business Matters Consulting provides consulting and coaching to small and medium sized businesses and their owners to help them achieve their fullest potential.  For more information please visit businessmattersconsulting.com.

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6 Social Marketing Mistakes Business Owners Make

I’ll tell you right off the top: I’m not a social marketing expert. I have to work hard to create content, get followers and improve engagement. Many small business owners face this challenge. I do know this: 1. You don’t have to be a social marketing expert to get good results and 2: You should use social marketing as a part of your overall marketing strategy, not your only marketing strategy.

What I’ve learned isn’t about “hacking growth” or whatever is trendy. It’s about tested and true practices. Once you’ve created a repeatable social media model, you can use it to consistently develop and grow your brand. I’ve made a few mistakes while developing my own model. Here are some of them…

1. Don’t share with your network. Anyone with a successful social media program had to start somewhere – and that somewhere was probably with nothing. The first step is to let your friends and family know what you are doing. Don’t keep it a secret from anyone.  People, by their nature, want to help other people. Count on your personal network to be the starting point for followers, readers and likers. Enlist a few trusted friends to be your editors and proof-readers. Assuming you’re on Facebook with a few followers, consider posting an honest message that directly asks friends to check out your new page or website and specifically ask them to like and share your posts. Real friends and associates will happily oblige.

2. Change your message often, be inconsistent. I speak all the time about finding or creating a business model that works and then finding a way to repeat it.  My article on this topic was published not too long ago.  Please click here to read it. The message is just as true in marketing. Decide who you are and how you want to be perceived before you start broadcasting to the world. “Disruptor”, a trendy word right now, means someone who will break the mould, attack from different angles and become unexpected. While that is catchy and can have positive short term effects, if it distracts too much from what your core brand is it will only leave your prospects and customers confused in the long run.

3. Leave long gaps without activity.There’s no faster way to lose your followers’ interest than to not provide them with new content. Try to set yourself up on a schedule − again, repeatable consistency. Post new content on whatever schedule is suitable for your business, whether it’s daily, weekly, or bi-weekly, just make sure it gets done. People will get used to seeing new material from you at certain times and that is a good thing. If you like to work in flurries of activity or in the middle of the night, use a scheduling tool so your content is published when it’s the right time and people are looking. If you don’t have new content, be sure to keep your platforms active with quality and relevant re-posts. Share other’s work that your followers might find interesting and useful.

4. Don’t follow up. Now that you’ve been delivering great content and attracting some followers, they will start to respond. They will comment on posts, share your ideas and give you their email addresses to receive more. Now that you have their attention, it’s time to act. Thank people for their activity. Send them direct messages when it’s appropriate. Email material to those who gave you their addresses.  Create a personal connection that makes it just a little bit harder to turn away from. Not following up is like starting a conversation and not saying anything after the introduction. Keep talking! You are competing for your followers’ attention.

5. Don’t pay attention to peers, competitors or people smarter than you. You can learn something from everyone – so find out what it is. It is unlikely that what you are doing has never been done before. Research and find out the best practices of related businesses and your competitors. What are they doing that seems to be working? What can you learn to avoid from them? Look to leaders in your industry and see what they are doing. Better yet, ask them! Try to engage with them and get some good coaching and advice out of the connection. 

6. Use ONLY social marketing for your business. The point here is to look at the broader concept of marketing for your business. The reality is many people get caught up in social media as the only marketing they do. You can be disengaged and just sit behind your computer sending words out into space, but quality marketing has to extend beyond that. It has to make an emotional connection to drive activity. Make sure your marketing goes beyond Facebook, Twitter, LinkedIn and others. Different parts of your strategy support the others. Find ways to meet prospects face to face. Make it meaningful. Make it personal.

There may be a magic formula for successful social marketing, but I don’t know what it is. The marketing formula that has worked for me for more than 20 years of business ownership is a steady, consistent and quality brand message. Be engaging. Be interesting. Make social marketing personal.

I always appreciate feedback. Please feel free to comment. To find out more please contact me at businessmattersconsulting.com or of course at Facebook, Twitter and LinkedIn!

2 Things to Help Ensure Your Business Lasts

There are countless things you can do to make your business successful, and even more to ensure its failure.  There are plenty of lessons independent business people can learn from franchises to help them stay successful, after all, there’s a reason franchises have a much higher long term success rate over independents.  Here are two key ideas to help ensure your business lasts for the long haul.

1. Quality – Can you deliver your product or service well? Figure out a way to produce and sell your product, or deliver your service in a way that meets the expectations of you and your customer.  Do they know what it should be?  Identify its qualities, attributes and specifications.  Be clear about what they are, don’t leave any part of the decision up until the moment it happens. Quality can be done at a low cost, it doesn’t have to imply expensive.  There’s an intrinsic value to doing it accurately and the way you want it done.  Whether it’s a service or a product, the true meaning of quality is whether you are doing it to the specifications you desire – high or low cost, it doesn’t matter.  The classic example is McDonald’s Big Mac. Whether you love it or not, you know exactly what it is.  McDonald’s has created it to an exacting specification, not to the whim of the cook actually making it when its ordered.

2. Repeat-ability – Can you deliver your product or service well EVERY TIME?  Do you have the systems in place to make sure you are executing the production of your product or service every time? Some people get bored with checklists or find them too regimented. Have you ever been on a plane?  Every pilot goes through an extensive checklist before every flight.  It doesn’t matter if it’s their first flight or if they’ve flown a thousand times.  You complete the checklist to make sure every step in your process is completed the way it was designed, each and every time, without exception.  It ensures quality control and helps deliver what your customer wants: the same reliable, consistent service whenever they purchase from you.  You should build a process around the design of your product to make sure you can accommodate its creation and delivery the same way every time.  Make a systematized machine out of the process.  To use the McDonald’s example again – once the Big Mac was designed, they created a system in the restaurant that would allow any one of their employees (once trained) to create a Big Mac the same each order.  The ingredients are the same and in the same place, the equipment is in the right place and set to the right temperature and the packaging is the right size and in the right spot – EVERY SINGLE TIME.  No exceptions. It takes the variability of being ‘people dependent’ out of the equation and makes it ‘systems dependent’ – a much better way to ensure longevity. Customers come to know and expect what the product will be – and that is a powerful way to ensure your customers needs are met consistently and ensures they will keep coming back for more.

Unless you are buying “surprises”, most people want to know what they are getting when they pay for something.  Ensuring your product or service is made to a certain specification and that that specification can be repeated over and over is a sure way to help keep your growing business on the path to continued success.  Remember: create the model to the quality you want and then be able to repeat it over and over. Make your business a machine that churns out success.

I always welcome your comments, please feel free to share your thoughts.

7 Mistakes When Choosing a Franchise

There are many common mistakes people make when purchasing their first franchise. I’ve seen these before countless times, in fact, I’ve been guilty of many of them myself! It’s so easy to get caught up in the emotion of buying a business, that we often overlook important steps in the process.  Don’t lose sight of the fact that this is a long term relationship that must be mutually beneficial.  You are interviewing them as much as they are interviewing you!

Here are some common pitfalls to avoid when selecting a franchise to get involved with.

1. Don’t go too far outside of your knowledge base.  There will be lots to learn, new experiences, new procedures, new people, new everything! Keep some familiarity and comfort by choosing a business that is familiar to you.  Don’t get sold on hype – go with a business you know something about.  Have you worked in this industry before?  Does it provide a product or service you love and are familiar with?

2. Don’t base the decision on the number of units.  Size doesn’t matter!  There are lots of great concepts with very few units, and lots of really bad ones with hundreds of units.  Be aware of franchisors that put too much of their marketing weight behind the number of units they have or are planning to have.  If they’re growing, that’s great…just don’t let it over-influence you.

3. Don’t base the decision on their ‘ranking’.  Ever notice that it seems like every car you see on TV has won an award?  There are lots of organizations that supply awards! Like size, ranking is a piece of the puzzle, but not the whole picture.  There are lots of associations and organizations that rank franchises.  Understand what the ranking is and what its context is.  Best in category? Fastest Growers? Highest satisfaction? Best gas mileage?

4. Does the business align with your lifestyle?  Make sure that you have a clear understanding of the requirements of the business.  Bars and restaurant can require late hours. Coffee shops require early mornings.  Does the expected schedule line up with your personal life – family, friends, activities?  Too much conflict may lead to unhappiness in pretty short order.

5.Not getting a lawyer to review your documents.  This one happens all the time and it’s crazy!  Contracts and franchisee agreements are often over 50 pages of legal jargon, plus amendments, assignments, leases and on and on.  The cost of a good legal review and advice is nothing compared to finding out down the road you missed an important detail.  I’ve seen lots of franchisees that tell me they didn’t know about sales minimums, non-compete clauses, renovation requirements, territory restrictions, trademark infringement, transfer clauses and many others.  You’re making a deal that’s probably 10 to 25 years or more – a little diligence now is well worth the investment.

6. Not calling existing franchisees.  I always wonder about managers that make a significant hire without checking references…are they so sure they’re right they don’t want to risk hearing bad news?  This situation is no different.  You should be provided a list of franchisees, but not until you’re disclosed.  Start earlier in the process – look them up and call the franchisees.  Ask for a few minutes of their time and tell them why you are calling. Have questions prepared such as whether or not projections are realistic, how is the franchisee/franchisor relationship, etc.  You’ll get amazing answers – probably good and bad.  If you hear a lot of negativity though, that should be a red flag.  Be sure to get clarification on anything that comes up.

7. No exit strategy.  Here’s one I have been guilty of.  You get so excited in the process and your new venture you think it’s going to be all rainbows and puppy dogs forever.  You may never consider what happens when things change – and they always do!  Find out now how you can sell or transfer your business.  Will it even have a resale value? Find out if you can wind it down and walk away.  Will your franchisor buy your business back?  Some of these options will be spelled out in your agreement and others won’t be mentioned. Ask yourself “What is the worst case scenario?” and have a contingency plan for that.

Franchising is an exciting way to fulfill your dreams of being your own boss and a business owner.  Being part of a terrific organization can reduce your risk and instill a sense of pride.  There can also be many pitfalls and challenges you may not consider.  Hopefully I’ve shed some light on a few so you can avoid them.

If you have any questions or comments, please feel free to ask!

Please visit us at businessmattersconsulting.com to learn more.

How to avoid employee resentment

What’s the best way to get employees to buy into an idea?  Even more than that: how do we get them to listen and engage without any resentment?

A lesson I learned early from my mentor is the concept of an emotional bank account.  The concept is simple: make more meaningful deposits than you do withdrawals.

I had a general manager at one of my businesses who would complain to me that while he wanted to be strict to keep the staff in line, he felt like it was “babysitting” and all he got back in return was grief, disobedience and resentment.  Doesn’t sound like a happy workplace!  My message to him was clear: make some deposits before you withdraw. An emotional deposit can be done right with a withdrawal, but it’s usually better to build up those deposits over time.  It helps you establish emotional credibility so when you need to make that withdrawal, you have the balance available.

If you spend too much time only making corrective actions, or disciplining for unwanted behaviour, all of your people’s accounts will be over-drawn; and honestly, the ones that aren’t will be against you just by your reputation.

The deposits should be easy, but are often difficult for some managers to do.  Catch your people doing something well, provide plenty of positive reinforcement and recognize them for their accomplishments.  It puts them in a better mood and will almost certainly improve performance in the short term.  If this becomes a pattern of behaviour your emotional balance grows.  The next time there needs to be discipline applied, it will be much easier to take. Just remember to make more deposits!

Do you have a story where you have made those deposits and the tougher discipline conversation has been much easier as a result? Please share!