Most people start a business because they want to provide a product or service. They feel that they can make the best product or can provide the best service. They’re passionate about a business that will do that. And at some point in the future, they likely want to sell the company, because ownership isn’t forever. If you have a successful business, then selling to somebody else at some point is almost inevitable. At the very beginning identify what your end goal is and then pick a date when you want to be done with it. Then you can plan ahead to add value to your business.
Let’s say five or ten years ago you started a business and now have decided you’ve done what you need to do. And you think it’s time to sell it. Well, if you talk to a business broker about that, they will tell you there are certain things that add value to your business. This is not necessarily something that people consider when starting a business.
When you start your business, you are the main person in the business, perhaps the only person in the business. And so you’re doing everything. At that point, what you really own is a job. If you own a home inspection company and are the home inspector, you can be very busy doing home inspections every day and generating enough revenue. Let’s say you decide ten years later it’s time for you to move on and you want to sell the company. However, you are still the only home inspector doing inspections. The business depends on you being there. It cannot function without you. You aren’t selling a business… you’re selling a job!
Same thing if you are a plumber. If you are doing all the plumbing work yourself, when it comes time to sell it, the only people who are going to be able to buy it is another plumber who wants to come in and do the plumbing work themselves.
Instead, you want to make a business that is truly valuable. One that can operate without you. You want be be able to add value to your business! At ActionCOACH, our definition of a business is, ‘A commercial, profitable enterprise that works without you.’
In order to make your plumbing business work without you, you must step away from actually doing the plumbing jobs. And that may be difficult since you started the business because you’re excited about plumbing. You like doing plumbing. You enjoy that work. Maybe you’re an electrician, you like fixing the problems. You’re a problem solver. And people come to you with the problems and you help them out.
In order to add value to your business, what you must do is extricate yourself from the business. Build a team that is able to do the work on their own and solve the problems. Build systems for each area of your business. Production, Operations, Marketing, Sales, Business Development, etc.
Let’s say your business is dependent on you and your revenue is $100,000 a year. How much can you sell it for? Likely not more than $100,000. However, if you have a business that is working without you, that has a profit of $100,000, how much is that worth? It’s worth a lot more than $100,000. It’s worth a multiplier of that. And that multiplier depends on a variety of things, including the industry you’re in.
Do you have to go into your business daily? The multiplier may not be as high. Do you go into your business weekly? Perhaps you simply call in on a weekly team meeting? That’s a pretty good ownership level there.
Maybe your general manager is running the business very well. You as the owner can say, “Hey, I’m going to go to Aruba for six months and I’ll call you when I get back.” Okay. That’s a business where that value is much more than $100,000 a year. That’s probably worth ten times that when it comes time to sell it. So that business would be worth $1,000,000. And if your revenue or profit is $1,000,000 a year, maybe the business is worth $10 million.
Creating a business that can work without you is absolutely key to add value to your business. Yes, profit matters. Yes, revenue matters. But that multiplier is a function of how much or how little the owner must be involved in the business and impacts the value greatly. The lesson here is: Don’t sell a job. Sell a business that works without you.
If you are interested in learning more about how to add value to your business: Attend one of our Lunch-n-Learns where our Coaches will share strategies related to growth and value. Or sign up for a free 1-hour coaching session with a certified business coach!
