What is your business really worth?
Let’s say you’re a one-person company and you mow lawns for a living. First of all, congratulations on being able to enjoy the great outdoors! Must be nice to not be a desk jockey, huh? Eventually, though, you might want to spend that time outside fishing, playing golf, or sipping an Ambergeddon from Ale Asylum on your deck. You approach a niece of yours who’s always been jealous of your whole be-your-own-boss thing, and the conversation goes like this:
You – “Hey, did you ever think you might want to buy my business?”
Her – “That’d be great! I could work outside in the sunshine and wouldn’t have to report to this idiot boss. What happens first?”
You – “Well, I sell you my lawn mower and my client list, and you just get to work.”
Her – “Hmm, well that sounds okay, but shouldn’t I just buy my own lawn mower and start knocking on doors?”
You – “You could, but buying my client list could save you a lot of time.”
Her – “True, but aside from that, are you going to train me on how you actually run the business? You know, things like keeping the books, how to deal with clients, and when I should actually show up and mow which lawns? What if I get too busy or too slow? How do I keep customers happy? I should be out trying to find new business too, right? I would guess that some people might not like how I do the mowing, and those customers might need to be replaced.”
You – “Well, I have just always kept that stuff in my head, aside from the annual tax return, of course. Umm, I guess I thought you’d just figure that stuff out.”
Her – ” Tell you what, I’ll try buying my own mower and see if I can get some people in some different neighborhoods to work with me first.”
You – “Bummer”
This situation is undoubtedly true in a lot of businesses, and not just in one-person companies. Wouldn’t you agree that many, many business owners (maybe even you) just simply own a job instead of owning a business? What’s missing here?
Changing gears, let’s say you’re looking to buy a property to hold as a real estate investment. If you’re looking at anything 4 units or larger (typically non owner-occupied properties like single family homes, condos, or duplexes), you’ll see an equation called a capitalization rate or “cap rate” as part of the property listing. Here’s the simple equation – In English, this means that with a property of this size (and certainly in bigger buildings), an investor – you, in this case – would buy the property for the income it derives as a result. Said another way, what will this property pay you to own it? Most real estate investments will currently pay an average of 6.74% (source – Jan. 28, 2014 Wall Street Journal). If you’re transacting real estate at all, it’s expected by both the buyer and seller that these numbers will be not only available, but as accurate as possible.
How to make your business worth a lot more – systems
If you’re a seasoned investor, you’ll probably do better than an amateur with this investment since the annual net operating income (rents – expenses) can be positively affected by your experience. You’ll be better at collecting rents, limiting tenant turnover, and controlling expenses because you’ve developed the systems to operate more efficiently. You’ve figured out which issues need a plumber, and which issues just need a plunger. Let’s say you’ve gone a step further and actually written down these policies in an operating manual. You then typed them up, printed them off to put in a binder and labeled it, “Here’s How We Do Business.” Wouldn’t that save a heck of a lot of time (and money)?
So, back to your fictional lawn care business – what would happen if we took this same approach of building the necessary systems? That would take time, right? Yep. But, if you write it down, print it out to put in a binder, and it said –
- Here’s exactly what to do in every situation I’ve faced over the years.
- Here’s which houses I mow on which days.
- Here’s what size truck I use to haul all the equipment
- Here are the marketing pieces I’ve tried, and here are the ones that have worked the best
- Here is the accounting system I’ve used to track what months are great and what months aren’t so great
- Here’s what money went in and out of my business every month (cash flow) so the owner knows how much money he or she is making now and how much he or she can expect to make in the future
…and on and on. Would you agree that instead of a business that pays you to work in it, you might be able to have a business that pays you to own it? Now, what is your business really worth? When you approach a possible buyer for your business, it could be compared to other investments (such as real estate) because you actually have this information available.
Alternatively, if you wanted to take a vacation while still operating the business, could you confidently turn over your equipment to a friend – who knows how to mow lawns – and trust that he or she could follow the operating manual you built? When it came time to sell your business to your niece (or whomever) wouldn’t it be worth dramatically more? Wouldn’t it be easier for that new owner to hire someone to fill that position of Lawn Mower, give the person that magic binder, and spend his or her time finding more business?
Couldn’t you write this stuff down and concentrate more time on building your business right now?