Sunday, February 03, 2008

A Few Notes on the Value of Your Business

This is an open letter to SMB Consultants who are going through tough times. It's a bit of tough love, so don't be offended.

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When your business is large, the "standard" rules for valuation apply. I suspect the larger you are, the more they apply.

But when you're small -- really small -- then the only rules are what the "buyer" is interested in.

I've had a couple of opportunities to buy up small consulting businesses. For me to do that, the circumstances would have to be just right. A deal in which my company writes a check and takes on your company: I don't think so.

First, I don't know about and don't want to know about your debts or personal stuff.

Second, I already have a business. That includes equipment. So I don't need your used servers, desktops, laptops, printers, etc. If they're absolutely brand new, then maybe there's something there at ten cents on the dollar.

So how do I value your company?

Remember: There's nothing personal here. It's all just business.

- I want to know what your recurring revenue is. That means signed contracts.

- Note, please, that I don't care much what's in your contract because it's going to be null and void, and we're starting over with my contract. I only care about your contracts because they represent people who believe in ongoing service agreements, have trusted you to take care of them, and have some probability of signing with us.

- Note, because of the previous item, that I don't care whether your agreements are for three years, or simply month to month. They represent clients who might sign a deal with us. Since we're not buying out your agreements, we don't care too much about the specifics.

- My assumption is that 50% of these people won't sign with my company.

- I don't care about your break/fix clients. We might do a dog and pony show, and try to get them. But if they wouldn't sign an agreement with you, they probably won't sign with us.

- If you have a spectacular employee, I might interview that person. But my company already has staff, and an ongoing company culture. So there really has to be a need and a fit it we're going to hire someone.

- Your role depends on whether you want to be in this business, want to work for my company, and can accept the fact that you're an employee here.

- The more personally involved you (the owner) are in the daily running of your business, the less value it has to an outsider.

Here's a sad truth for micro companies:
When you get hit by a bus, one of two things can happen.

1) The company goes on fine without you and your survivors just collect a monthly dividend.

or

2) The company literally ceases to exist because it's built around you as an individual and no one's left to take care of a million details that only you can do.


So what's the real bottom line?

- If you have a very successful business with lots of recurring revenue and very happy clients, then my chances of keeping those clients and making money goes way up. So the value of your company goes way up.

- If you're mostly break/fix with one good client, then your clients have no value to me.

- If you're a an S-Corp with a handful of employees -- and you're profitable -- then I'm willing to talk about transitioning your best clients to our care, in exchange for a fee.

- Bonus Round: If by some chance you have a substantial organization, everything works great, and you bring in a solid, stable, predictable profit every month without you doing all the work, then your company's worth buying outright.

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In a perfect world, a buyer would like to see a purchase as an investment. If you have a profit of $X,000 per month and $Y,000 per year, then I know the ballpark of what that's worth. I can look at the stock market and speculate that I'll get 10% on my money in an S&P 500 index. Your business is a lot more risky and I'd need a bigger payoff. But at some point we just do the math.

Unfortunately, the average person looking to sell their business is doing so because they don't have a steady stream of revenue, they're going through a rough patch, and they need money fast. If you haven't structured your business so it has visible, measurable value to the outside world, then the chances that you've achieved that are very slim.

I don't mean to be a downer here.

But reality is what it is.

Assuming you want to have salable value in your company, you need to start working on that today.

2 comments:

  1. Excellent article. A bit tough for some to take, but very true.

    ReplyDelete
  2. steve jennings4:30 PM

    Great points. I beleive the trouble most owners of small IT firms have is that they love doing the work. They are technicians at heart and it is extremely difficult for them to work on the business instead of their clients systems. Any MSP that wants to survive today must excel at marketing their services first and formeost!

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