7+ reasons why Small Business Owners commonly over-estimate their business value
The key to exit planning is to have an accurate idea of what your business is worth – its business value. Clarity on this will lead to better decisions. Not thinking about this leads to a huge risk as you will find out at the end. Business Owners commonly over-estimate the value of their business due to one, or more of the following reasons.
7. Its an act of manifestation
The business is their baby, their creation, business is personal, it is a reflection of them. As business owners, they are likely to present their achievements in the most promising way, in the most flattering light. They may discount the way their considerable investments have depreciated over the years. They may overvalue the brand loyalty they have enjoyed, particularly in a more competitive environment.
6. Its a one-of-a-kind
Owners don’t have comparables in the marketplace for their business. Comparables (comps) are used in valuations where a recently sold asset is used to determine the value of a similar asset. We see this in houses. Estate agents will be able to predict quite accurately the value of terraced and semi-detached houses, and can point to other similar sales nearby. As the houses get more unique, so the pool of comparables gets smaller, and so the range of the predictions becomes wider, and with less data, the less accuracy, and as we all know, the market likes certainty.
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5. It’s not on the radar
Business Owners are not familiar with the process of selling a business. It is not generally something they have done before. They are not familiar with the timescales involved. No one plans to have a heart-attack, no one says in two years, three months I am going to have a road traffic accident. These things take time, and a rushed process will result in a lower valuation.
4. The Art of the Deal
When you sell a business, the number of possible buyers is quite small. These people are entrepreneurs, investors, they like making money and doing deals. The hard fact is the people wanting to buy a business don’t want to pay full price. They are likely to be looking for a bargain, and they love driving down deals.
3. Competing against a Unicorn
Truth is, to recreate a business, it may be cheaper to start from scratch. An existing business may have historic investment costs, that don’t apply any more, outdated plant, machinery, even the staff may be suffering from a lack of investment in up-to-date training. The barriers to entry may be reduced.
2. Business Owners undervalue themselves
While they overvalue their businesses, they often undervalue their time, and discount the benefits. They will know all their numbers, the sales turnover, the wages, the expenses, etc, yet they often have a blind spot with themselves, both in terms of time and benefits, and both these factors compound into them valuing the cost of their business more. So let’s look at both these factors.
The first is time that typical business owners spend working in the business. They are unlikely to be working the average 37.5 hours a week. They are often the first ones in the office, and the last to leave. They are more likely than their employees to be working at the weekend, and they are more likely to be doing other important business generating activities, such as networking, referral building and strategic planning. Add in learning and emergency cover, and this soon adds up.
If you multiply all these extra hours by the hourly rate of a top-flight managing director then you soon come to a large number which doesn’t appear on the spreadsheet.
The second factor is the cost of all the benefits in kind that business owners enjoy which also don’t end up on the spreadsheet. While these figures are not what they once were, when business lunches were common perks, company cars ruled the road, etc. This all needs to be factored in.
1. You can’t compete against free
They are competing against free, or almost free. If you were looking to buy a business, would you go for a long-established, well-run profitable business, or would you go for a bankruptcy. A business in trouble that you can rescue, and turn around for a profit.
Plus a bonus – Business Value #101
They might not actually be able to sell their business. A great example of this is Tony Robbins. According to legend, when he tried to sell his business it was worthless, he was his business, and you did not get him, so you got nothing. I exaggerate but look at Tony Robbins business now, you can see how it is being repositioned as much more than just about him, as a business that could be sold, as a legacy.
Having an inflated idea of what your business is worth is dangerous. It leads business owners into a false sense of security, it makes them think they could sell their business if the need arises, however the truth can be very different. Not having a clear understanding of the true value means they fail to plan a robust exit strategy.
Seize the day and act now, before it is too late – the benefits of a clear business exit strategy can be astounding. Find an expert who can help guide you and support you as you work towards an accurate business value assessment and, ideally, increase it’s worth in the process!
Simple, straight, blunt advice … that would be Yorkshire Powerhouse
Now you’ve read our article about business value issues – have you any questions?
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