What's Your $1 Million Business Worth?
Revenue of $1 million doesn't always translate to $1 million in value at sales time.
By: Chia-Li Chien | Published 07/29/2010
What are the three most important things in real estate investment? Location, location and location. But what makes a privately held business valuable? According to Rob Slee, founder of Midas Nation, it's timing, timing, timing. During my 2nd quarter 2010 SRI Business Retreat, Slee said you have to play the Transfer Timing Slot Game if you want to maximize your business's value for sale. Let's explore what Slee meant by that.
We know that 95 percent of small businesses have less than $1 million in revenue. Hence, the No. 1 goal for small businesses is to reach $1 million-plus in revenue. But what if you reach $1 million in revenue and find out that the business isn't valued at $1 million? The most horrifying news is that your business has $26 million in revenue, but at best it's worth only $1.5 million for the owner.
So what's more important to you as a business owner? Is it $1 million in revenue or $1 million in value to you? What makes a business valuable? In my recent interview/study, Barbara Taylor, co-owner of Synergy Business Services and a New York Times blogger , emphasized cash flow. Taylor explained that for businesses with less than $5 million in revenue, cash flow is often the determining factor of value. For larger business, it's the EBTIDA (earnings before tax, interest, depreciation and amortization) and multipliers that are the determining factors.
555 - Business Owners Love the Number 5
The 5-year block. Each five-year block in a business is a milestone.
* At your first five-year block, you've proved your ability to be one of the 50 percent of businesses the SBA says survive the first five years. This is your first important milestone.
* After 10 years, you feel like you're not making much progress. You might not be able to verbalize it, but you feel like you're stuck. At the end of the second five-year block, you will do one of the following things:
1. Call a business broker and tell her you want out.
2. Hire help to strategically move your business ahead.
3. Do the same thing you've done in the past. Many of the calls Taylor receives are from owners who feel they've maximized their capability. They're tired, and they want to move on.
* Fourth 5-year block, or 20 years, you've either figured it out or not.
Five years to exit. If you ask a business owner, "When would you like to exit your business?" the answer is always five years. As matter of fact, if you ask the same question five years later, you'll still get five years as the answer.
My business is worth $5 million. If you were to ask a business owner. "What's your business worth?" you'll get some multiple of $5 million. It's $5 million, $10 million or even $50 million.
Fifty percent of the consultation calls I receive are from owners in their second five-year block, and 50 percent are in their fourth five-year block. No wonder business owners love the 555.
So let's try this question again. Is it $1 million in revenue or $1 million in value to you? I sincerely hope you chose "value" and not "revenue." Consider the following as you strategically grow your business:
* Watch the sign of the "5YB." If you've been in business for a while, ask yourself, which 5YB are you currently in? If you feel like you can't break through a certain revenue point, ask for help. Do it now; don't wait.
* Visualize what the future looks like. You need to create a Company Wealth Map that can guide you forward.
* Set a minimum of three times today's value as a starting goal. If you were to invest $100,000 in a publicly traded company over 20 years, you would receive very little in dividends. But at the end of the 20 years, you want your principal back. Assuming a 7 percent annual interest rate, the amount will double every 10 years. Therefore, you should expect $400,000 worth of value. However, if you were told that you'll get $0 back, will you still invest in that publicly traded company? Probably not. Many businesses close without cashing out. Set a goal of what your business is worth and demand a return on your investment.
Grow your business strategically to increase not just revenue but also value. Nothing happens overnight; don't let the $1 million revenue goal fool you. Build your business with the right foundation, so it will grow in value for you.
Chia-Li Chien, CFP®, CRPC, PMP; helps women entrepreneurs to convert their business into meaningful personal wealth. She is the author of Show Me The Money and columnist for WomenEntrepreneur.com & Fox Business online. She is available for consulting, speaking engagements and workshops. She can be reached at www.chialichien.com or firstname.lastname@example.org.
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