Valuing Your Business for Sale

There are many different ways to gauge the price of a business for sale. Some of the more common include valuing the business based on profits, cash flow, assets or sector. The challenge with all of these methods is that they rely solely on financial data, and miss valuing intangible assets such as customer goodwill, corporate culture, staff relationships, and brand. All of these are crucial ingredients in the lasting success of any business.

While it is difficult to attach numbers to how much these intangibles impact the bottom line, their is evidence that they do. The reality is that all too many businesses, once sold, fail to live up to the performance expectations anticipated prior to the sale. For this reason, many purchasers insist on the owner and other key staff staying on as part of the sale for anywhere from one to three years.

These intangibles can also be what limits you from selling your business at all. Despite annual revenues of up to a million dollars, a consulting colleague of mine began attempting to shift the bulk of his work over to one of his associates in anticipation of selling the business to him. Unfortunately he discovered that his clients were resistant to working with anyone but him. The intangible assets that his personality and the relationships he had built were so deeply ingrained in his business, that were he to separate from the business the business would, in essence, cease to exist.

The bottom line is that, whether or not you ever intend to sell your business, understanding and maximizing the intangible assets in your business is critical to building a business that is not dependent upon you or any other specific individual in it. This is the mark of a truly successful business.

An example of this are two good friends of mine, Lawrence and Lori-Ann Keenan, who run a very successful ESL school here in Vancouver. They began the business as a couple, doing almost all of the work – from teaching the classes to marketing the school and everything in between – themselves. After just ten years, she now works only one day per week, and his involvement with the business is negligible, save for focusing on investing their profits.

What has allowed them to have such freedom is that they have created and continue to refine written systems for everything they do. The importance of creating systems is understood by most business owners, but generally they focus on creating bare-bones systems that reflect simply the “how to” rather than the “how we do it here”. What sets my friends’ business apart and allows their success to continue to grow despite ever more limited involvement from its founders is the systems they have developed for instilling a distinct culture and personality into the school.

The school is very much centered around Lori-Ann’s personality. Like her, it is high-energy and fun with a no-nonsense professionalism and a passion for excellence in customer service. An example of one of the systems that sustains this is a weekly high-energy graduation ceremony at which all students are present that involves plenty of clapping, singing and general fanfare. Back in the teachers room there may at times be some rolling of eyes at the anticipation of this weekly ritual, but once they step out into the limelight to play their part in the celebration, they find it hard not to be caught up in the simplicity and energy of the familiar routine.

Companies like Google have systematized a culture of innovation by requiring employees to spend twenty percent of their time on side projects not related to their daily work. West Jet systematizes fun with their pre-landing jokes – no matter how corny they may be. Nordstrom has systematized customer service excellence through rigorous and ongoing training programs on empowerment and customer service excellence. Southwest Airline’s systematizes its culture by training all of it’s staff in “Living the Southwest Way” by practicing the three characteristics of having a Warrior Spirit, a Servant’s Heart and a Fun-LUVing Attitude.

All of these are examples of how to build those intangibles – the values, strengths and personality of a business that usually begins with it’s founder and forms the basis of a strong brand – into the core operating systems, principles and standards of your business. Not only will these types of systems make your business more attractive to potential buyers in the long-run, it will make it more attractive to those employees who are best equipped to deliver on your brand promise, thus attracting and keeping loyal customers. Ultimately these intangibles are not only what drives a strong bottom line, but sustains it over the long term. They are, at the end of the day, where the true value of a business lies and what helps any business owner to realize the full value of the business they have built – whether they sell it or not.

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