It used to be that you’d open a business for the long haul. The concept of an acquisition was foreign and no one had heard of an “exit.” Put a group of entrepreneurs in a room today however and you may hear “what’s your exit strategy” as much as you’ll get great independent coffee shop recommendations.
In an age where startups are sold for millions in what seems to be overnight, it’s hard not to wonder how much your business is actually worth.
Yet before you call up your college buddy turned investment banker or brush up on your Excel modeling skills, you should probably stop and ask a more important question:
The value of a business is really whatever someone will buy it for. Crunch as many numbers as you want, but with no buyers, there’s no value.
While it seems like a simple concept, it’s one that’s often overlooked. Consider a graphic design business with three shareholders. Their business is starting to develop a reputation in their community and the founders are all young just out of university.
Now let’s suppose a web development business wants to expand into the community. They could do it by slowly building up a reputation through hard work, or they could buy the graphic design business, with an already existing reputation and essentially boost their profile overnight. The three shareholders however have few dependents and are just at the start of their careers so they may not want to sell so fast. In that case, the value of the graphic design business may be inflated as the incentives of the buyers and sellers and are at odds.
On the other hand, suppose the shareholders get into a dispute. They decide that only one of them can carry on the business and that person must buy the others out. In that case, the incentives are such that everyone wants out, driving the price of the business down.
While it may be the same business, circumstances will significantly affect its value.
So how do you determine how much your business is worth?
While there are a number of considerations and fancy modelling techniques, it’s a question that’s largely subjective. It’s always important to first examine the incentives of the buyers and sellers to get an idea of its perceived value, what will ultimately drive the price.