The Appraisal You Can't Afford to Miss

Business valuations can be brutal—but they can also reignite your passion for your firm

Written by Dave Zimmel

After 30 years working to service the oilpatch, a longtime client was tired of industry ups and downs—and the attendant stresses of upsizing and downsizing. He started to think of selling his business, and came to us to see whether the time was right to do so.

That’s when he got a huge surprise. He learned that the business he’d so lovingly built wasn’t worth nearly as much as he’d thought. In fact, if he wanted a quick exit, his best option to cash out would be to take the firm’s equipment to auction.

This situation is actually very common. That’s because many entrepreneurs don’t have an accurate assessment of the true value of their businesses. Nor do many have a clear understanding of how much money they will need to live the life they want once they exit. As a consequence, they end up disappointed; after all, no one wants to just give away their life’s work.

As an entrepreneur, you probably have most of your net worth tied up in your company, and there’s a good chance you’re counting on accessing that money by selling your business one day. It’s natural to expect to see a return on your investment of blood, sweat and tears. So how can you avoid being caught out come exit time?

Businesses are sold based on the cash flow they will generate for a new owner. Buyers are willing to pay a multiple of your cash flow; that factor—called a multiple of earnings—varies. If your business doesn’t have much cash flow, you’re faced with a liquidation of assets—not exactly the windfall you’d want.

There is another option: to delay your exit from the business until you can drive up its value. This means improving the business to the point that it is healthy in all the areas that affect its balance sheet. And how do you do that?

In our experience, it’s a four-step process. First, establish standards of excellence related to four key areas—your customers, your operations, your staff and your finances. Second, evaluate how your firm is measuring up in those four areas. Third, take necessary measures to close the gaps. The healthy balance sheet you desire will follow.

Ignited by his awakening, our client was game to take a critical eye to his firm’s performance. He determined the most valuable customers on his client list and came up with ideas for solidifying their trust and loyalty. He put the firm’s operations under the microscope to come up with new ideas to boost efficiency and quality. He took a hard look at his human resources needs, and came up with strategies to ensure all employees were motivated to do their best. Finally, he came up with some actionable strategies to give him the margins he needed to attract potential buyers.

This evaluation gave him new clarity into his business, and his new energy benefited the firm immediately. The company now has strong enough cash flow to give him real value should a buyer come calling. The irony is that he no longer wants to sell.

Our client chose to involve his entire team in his business renovation, and employee engagement has gone through the roof. That, in turn, has removed many of the stresses of business ownership. He is once again enjoying entrepreneurship; he’s committed to growing the company, and is now considering acquiring some other firms.

Any business owner can build the value of his or her business—but it takes a bit of humility. You have to resist the temptation to simply believe you know what your business is worth and find out the real value.

You also have to be willing to do some things differently. Once people open up to change, they find that improving a business is actually a lot of fun—and it doesn’t have to be expensive. With the right tools and processes, your company will work better, your team will enjoy helping the business succeed and, should you decide to exit, you’ll be exiting smart.

Dave Zimmel is a partner and the vice-president of Private Enterprise for MNP in Calgary. He focuses on providing assurance, accounting and business advisory services to private enterprise clients in the oilfield services, construction and real estate sectors.

More columns by Dave Zimmel

Originally appeared on PROFITguide.com