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What’s My Business Worth? How to Create a Business worth $1 Million

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What’s This?

Like all entrepreneurs, I am always keeping track of what my business is worth. It’s not that I have any plans to sell MOBE, but I need reassurance that my company is growing steadily and increasing in value.

Unlike me, I know that a lot of entrepreneurs are in business just so they can enjoy a big payday when they sell. John Warrillow, author of Built to Sell, says that if you want to earn millions for your company, you’ve got to put it together the right way.

Personality-Based Business Is Easy to Set up, Not Easy to Sell

A lot of entrepreneurs, myself included, have set up what Warrillow calls a “personality-based business.” These companies, easily put together with just a laptop and a great idea, rely primarily on the character and charisma of the entrepreneur to make a profit.

When I heard John talk about the personality-based business in his interview with Mike Dillard for the Self Made Man podcast, I realized that’s exactly what my digital marketing business was in its early days—and it still is, really. The clients connected with me personally, and as MOBE grew, it became more about following the “Matt Lloyd business plan.” Unfortunately, like Warrillow says, that kind of company is impossible to walk away from.

I’ve realized that to sustain the growth of MOBE or any other company, it needs to be “you-proof,” as Warrillow says. I’ve been working to take myself out of the equation, supporting other consultants and business leaders to take the lead on events and marketing.

The less dependent your business is on you, the more valuable it is to an acquirer. Will your business fall apart the second you’re taken out of the equation? If yes, then it’s essentially worthless to buyers.

Make Your Business worth More to Buyers

To examine the salability of your company, Warrillow advises that you need to identify which products and services meet the three criteria for scalability.

Ask yourself, “Is the product or service teachable? Is it uniquely valuable? Are sales repeatable to the same customers?” Products that don’t meet these criteria should be phased out or improved. “Ultimately, the goal is to have one product or product bundle that is scalable.”

Here’s an example of a simple business that is worth a lot to a buyer: a school photography company. Usually, a photography business is dependent on the personality of the photographer, but school photography is an exception.

The process can be taught to new photographers; it’s valuable because school headmasters need specialized services, and it’s repeatable because photos are taken every year. This example is a valuable and scalable company that is worth a lot to buyers.

You could level up that same school photography company by adding a subscription element. Headmasters would agree to hire a photographer once a year to come in when it suits the contractor. Repeat customers often prefer to put as little thought as possible into their transactions, so that just makes it even easier for you to put them on a subscription basis and not worry about facilitating the sales process.

If your company features a product line that meets the three criteria for scalability, it’s already worth more than competing companies.

Build Your Business’s worth with Eight Key Value Factors

John Warrillow’s company, Value Builder System, helps small business owners valuate their companies according to eight key criteria: financial performance, growth potential, recurring revenue, monopoly of control, customer satisfaction and several other unique concepts. You can visit his website for a personalized valuation or simply run your own based on how well you meet each of these criteria.

“What [company buyers] are buying is your future stream of profit. They are asking themselves, ‘What is that future profit worth to me today?’” The more potential your current business has for growth and increased profit in the future, the higher you can sell it for.

The Business Value Envelope Test

All business owners should do what Warrillow calls the envelope test. John says, “It comes from a story in which the entrepreneur is asked by his mentor, ‘What’s the value that you would sell this company for?’ Write that number down, put it in an envelope and seal it. For most of us, that number changes. Remember that number so that when you’re in the heat of negotiation, your ego and your emotions don’t take over.”

If you’re talking to potential buyers, never put a price on your company. Why not? The same reason tourist shops don’t put price tags on their merchandise: They don’t want to limit themselves. Pricing your business outright puts a ceiling on the value that you will never break through no matter how hard you try.

Tax Penalties and the Sale of Your Business

“Talk to an accountant, and figure out what’s best for you.” When you’ve made your company as valuable as possible, talk to an accountant about your capital gains deduction. You usually have a capped amount you can pull out from selling a business. In some cases, it’s a good idea to have some of those capital gains in the names of your family members so they also can withdraw money without tax penalties.

Final Words of Wisdom

CEOs spend the majority of their time on two things: product innovation and sales and marketing. If you want to make your business acquirable, you need to stop handling those two things. Grow your business as much as possible while keeping it stable, and continue making it better for a couple of years until the time is right to sell. How many years before buyers feel confident about purchasing your business? Warrillow says, “The higher the better. Three consistent years is a good runway.”

Assess the worth of your business long before you intend to sell, and keep your eye on that value just like you watch your bottom line. When the time comes, hire an intermediary such as a mergers and acquisitions professional. They will take a percentage of the sale price on a sliding scale, but ensure the legalities and financial transactions of the purchase go as smoothly as possible.

“If you are philosophically chasing profit, then chase profit,” says the guru. “While you’re building your business, you need to reinvest those profits, but when you want to sell, you need to hang onto those profits for yourself.” Don’t forget that.

If I ever decided to sell MOBE, I’d need to stop putting the company’s profits back into marketing channels, staff expansion and product creation and just leave it in my bank account. My company is worth so much today because of all the dollars I have reinvested into it over the last few years, but a buyer isn’t going to pay me any of it back. If it’s time for you to step back and start a new project, don’t forget to collect your well-earned profits first.

Article first appeared on My Online Business Education