For most of us, our business is our greatest asset - and the source of our future wealth and freedom. As business owners, we have a pretty good sense of what drives the valuation of that asset; a formula consisting of the current profit we can generate times a "multiple" (put simply: Valuation = Profit x Multiple, or V=PM). As you probably know, that multiple varies by industry; each sector has a benchmark multiple (or average multiple achieved).
Who controls your future wealth?
When I ask entrepreneurs, "Who controls your profit?", they are all very clear on the answer: they themselves do. However, when asked "Who controls the multiple?", the benchmark, most reckon it to be out of their control. At Shirlaws, we profoundly disagree with this and contend that you can greatly influence the multiple in your business to significantly increase the asset valuation. If this is news to you, then you can discover more about why we feel this way in our article, 'What really drives equity value'.
There is a further complication. Whilst you can control the value of your business relative to the sector benchmark, the valuation of the entire industry can also be influenced by timing. We all appreciate that the benchmark multiple in our sector will shift depending on what is going on in the industry; but do you have a valuation strategy that is linked to timing in the marketplace?
Timing is influenced both by external factors, such as the economy, and by the perspective of the buyer or investor at a particular time. Let's look at this more closely.
Firstly the economy. Clearly, assets are generally downgraded in a recession. But things can turn around quickly from a valuation perspective, which is why a focus on assets is so vital at this point in the cycle. Having a clear strategy to build specific business assets and in the right sequence is vital to maximise the cyclical opportunities of the coming recovery.
When you come to sell will anyone be buying?
So what's the hurry? We can look forward to at least 8 -10 years of growth, surely? There's plenty of time to maximise the assets to sell or capitalise? Well, possibly not - and for sociological reasons which are both beyond our control and, all too often, not considered by business owners.
A quick glance at the demographic profile of western economies will show you that there are an awful lot more baby boomers than there are of younger folk (the so-called Generation X and Generation Y). Business owners now in their late 40s and 50s coming to sell their businesses in 8-10 years time may find an excess of businesses assets available for sale and a scarcity of people looking to buy.
Worse still, this younger cohort now becoming economically active have lived, studied and worked in some of the most challenging macroeconomic conditions since the 1920s; and this has bred in them a unique sense of ambition. A recent survey in the US suggested that 52% of the "millennium generation" either already had a business or had a credible plan to create one. You may find a generation of entrepreneurs coming up behind you with no interest in acquiring your hard-built business. They already have one.
These trends suggest that it is vital to get ahead of the curve and look to realise your assets sooner rather than later in the upward cycle. And that means marshalling your assets effectively now and over the next 2 years.
How your business feels might just determine what it's worth...
It's also important to examine the position of your venture in its own business life cycle. Businesses look and feel, to a buyer or investor, very different depending on where they are in this cycle. Inevitably, most of us want to enjoy our business when times are good. Whilst there are plenty of reasons to sell up (retirement, for example) all too many business owners only look to exit when running the company gets frustrating and stressful - because it has reached a naturally more challenging point in the life cycle.
Yet this is exactly the wrong approach to take if you want to maximise your value from a prospective investor. These lifecycle changes are entirely predictable and you can get a good idea where your business stands by taking our free diagnostic, now.
In summary, maximising the wealth you can accrue from your business is a good deal more complicated than waiting for the economy to improve. Luckily, it is also a good deal more within your control than you might have thought. Timing is everything if you want to fully enjoy the future you have worked so hard towards.
Guest post by John Rosling, Shirlaws UK CEO. Find out more about Shirlaws at: www.shirlawscoaching.com
It's also important to examine the position of your venture in its own business life cycle