Sales Masters Guild Mentor, Mike Ainsworth looks at how having a sellable business gives you more value, even if you have no intentions of selling.
I’ve been selling businesses for more than six years now through my office of Everett Masson and Furby. During that time I’ve valued more than 700 businesses, most of whose owners thought that they had a sellable business.
In truth a large percentage of these businesses either weren’t sellable or if they were the likely sale price wouldn’t have been enough to encourage a sale. Consequently quite a number of these businesses are still ticking along or in many cases have been shut down,
For the past three or four years I’ve been educating business owners about the importance of having a sellable business and in turn having a more valuable business. I’ve written a book on the subject and I’ve helped quite a number of business owners understand what makes a business valuable and then how to improve the sellability and value of their business.
Fast forward to early 2019 when I was introduced to John Kettley, founder of The Sales Masters Guild and creator of the Entrepreneur Formula, a system that he has designed that helps business owners to create extraordinary success and avoid the traps that cause most businesses to fail.
I was immediately impressed not only by John’s enthusiasm but also by his system.
When I value a business and particularly when I assess the sellability of a business I look at the drivers that create a value for that business. In other words I consider the attributes of a business that either reduce the risks of ownership or enhance prospects of future growth.
There are plenty of drivers but some are common across all industries. In practice many experts these days concentrate on eight identifiable factors and these are:
The history of producing revenue and profit combined with the professionalism of your record keeping
Potential for Growth
The likelihood to grow a business in the future and at what rate
Internal or external over-dependence
How dependent a business is on any one employee, customer or supplier
Cash Flow Generation
Whether a business generates cash or sucks it in as it grows
The proportion and quality of automatic, annuity-based revenue collected each month or year
The Value Proposition
How well differentiated a business is from its competitors
The likelihood that customers will re-purchase and also refer a business
How a business would perform if the owner were unexpectedly unable to work for a period of three monthsDuring my early discussions with John Kettley, I discovered that there is almost a complete congruence between The Sales Masters Guild’s Entrepreneur Formula and the advice that I’ve been giving business owners over the past few years.
Of course strategically not all business owners are interested in selling their business, either now or at a future time. I don’t think this is relevant.
There are in particular three areas that stand out for me as being critical to both systems and that demonstrate why a sellable business is valuable whether or not your plan is to sell it.
The first is the most obvious and that is financial performance. Increasing sales and therefore financial performance and owner earnings is the most fundamental concept of the Entrepreneur Formula.
In business valuation the starting point is always multiple of earnings so it follows that the greater the earnings, the higher the value. But there’s also another benefit to growing a company because, all other things being equal, a business with higher earnings will achieve a higher multiple than one with lower earnings.
So for example:
- Company A – Turnover £1,000,000 EBITDA £100,000
- Company B – Turnover £500,000 EBITDA £50,000
In this case Company A might achieve a multiple of 3x earnings and Company B 2x earnings (stressing that everything else is equal) so Company A would be valued at £300,000 whilst company B would only be worth a third of that value, despite having earnings of 50% of Company A.
The second area where the Entrepreneur Formula and valuation / sellability of a business are in harmony is the business value proposition.
In business a company with a differentiated product or service is attractive to customers and in a competitive world will be the business that achieves a better balance of sales and profit. If your business isn’t differentiated from the competition then you’re in the unenviable position of having to compete on price, which is clearly not an attractive proposition.
Similarly selling an undifferentiated business is challenging and it’s fairly obvious that asking a premium for goodwill will be easier if the business operates from a defendable position. In fact research has shown across a large sample of “businesses, that those with a monopoly in their market (or those that by the strength of their USP are perceived to hold a unique position) receive offers from buyers that are 50% above those companies that do not have a monopoly or perceived market position.
But the similarities go further than earnings and USP, because having a good level of earnings or a unique product or service are no measure of success if the business owner burns himself or herself out in achieving that level of sales.
So a second part of the Entrepreneur Formula concentrates on the importance of building a business that works whilst allowing the business owner a balanced lifestyle. For many this will mean putting a team in place to manage the day to day operations of the business whilst the business owner is elevated to a more strategic role.
It goes without saying that selling a business that revolves around the business owner can be difficult to impossible. This is why businesses run by overly hands-on owners are usually unnecessarily small and often worthless to those in the outside world.
John Kettley frequently refers to the difference between a self-employed technician, a business owner and an entrepreneur and one of the aims of the Entrepreneur Formula and Sales Masters Guild training is to turn struggling self-employed technicians into business owners and then to entrepreneurs.
When business owners join The Sales Master Guild they are usually more concerned about achieving a better level of earnings and a better work-life balance and that’s fine. However, those that can aspire to be entrepreneurs can also build a valuable business and by applying the Entrepreneur Formula they will unlock the potential to own a considerably more valuable business.
If you would like to discuss Mike’s training courses and how they could make an impact on your business, you can contact him directly through his Mentors profile page.
Mike Ainsworth is a Sales Masters Guild Personal Business Mentor.
Mike lists his three main strengths as: Having an analytical approach to problem solving, being commercial and understanding value, having compassion and deriving real pleasure in being able to help other people (or other people’s businesses)