Value your business

guest commentary by David Potts

I’ve lived in Fort Smith all my life. As I drive around town I see businesses that have seen their glory days. By glory days I mean they were once successful businesses that have closed their doors or have become irrelevant because of new technology or more successful competitors or burned out owners or some other life event.

Being a small business owner myself just barely north of 50 years old, it makes me wonder what my business will look like in 10, 20, or 30 years.

All business owners will eventually exit their business. The big question is how. For most closely held businesses the best and most profitable way for its owners to exit their business would be to sell it. Of course the next question would be when should they sell it. Although this is a sophomoric answer, the best time to sell your business is when everything is going great.

How do you know when everything is going great? Everything is going great when the business is experiencing fast growth in sales AND profitability, when you have hired the right people and place them in the right positions, when your company’s brand (name) is well-known, and when the business is not dependent on the owners presence because it runs like a well-oiled smooth running engine when the owners is absent.

But then again, wouldn’t the business owner be a fool to sell his or her business at a time that the business is so successful? This is quite the dilemma. Who said decision-making was easy?

A business’ value is generally a multiple of its earnings. The size of the multiple is dependent on the company’s future prospects. A business without any anticipated growth might be worth three times its current year’s earnings while a business with anticipated growth in sales of 25% might be worth 10 times its current year’s earnings.

But few companies can maintain a 25% annual growth rate indefinitely. If you wait too long to sell your business will you see a decrease in your business’ value? Will your company’s value slide from 10 times earnings to 3 times earnings?

Predicting the future and how it will affect your business is an impossible task. The ability to sell your business for top dollar is dependent on many factors beyond the business owner’s control. All businesses have to operate in a macroeconomic environment influenced by factors such as unemployment rates, government regulation, interest rates, and consumer spending. I speculate that very few small business owners give much time to consider how much their businesses are worth and some owners are so emotionally tied to their business that an exit strategy is never considered. What else would these owners do?

Carl Grimes, the managing partner of CBI-Sunbelt Business Brokers, a business brokerage firm focusing on selling businesses in the River Valley and north to Springfield, Mo., told me that in his experience people sell their businesses because they need to, not because they want to. Most businesses are sold because the owner or co-owner dies or has a health event, or because the business is distressed and the owners are trying to capture whatever business value is left before it crashes and burns.

If you are a business owner, you are focused on making your business successful by taking care of your customers and managing the process for maximum profit. You should be. But have you ever managed your business with the intent on increasing its value? Do you even have an idea what you’re business is worth?

Most business owners don’t know what their business is worth and they don’t know how to manage the business to increase its value. They may have an idea how much the property and equipment is worth. At least they know what the tax assessor thinks their property is worth. But for many businesses its real value is in its intangible assets: its goodwill, its customer relationships, its workforce in place, etc.

If you are a business owner without any idea of what your business is worth, allow me to make a suggestion. Find out. That will give you a starting point. Then learn what factors determine the value of your business and manage your business purposely to increase its value. Every few years have your business valuation updated to evaluate your progress.

I believe this new focus will make you wealthier. After all didn’t you start or buy your business to make as much money as you can? Knowing and monitoring what your business is worth might help you avoid a future where your only real value is as a caretaker to a declining business.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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