Grahams Guide Chapter 3: 

What Is Your Business Really Worth?

Ask ten business owners what their business is worth and you’ll probably receive ten different answers.

Some base it on years of hard work. Others on turnover. Some compare themselves with a competitor. Buyers, however, usually begin with one question: what level of sustainable future earnings am I buying and what level of risk am I taking to achieve them?

Valuation is part science, part judgement and part negotiation. Understanding how value is created is one of the most powerful tools an owner can have before going to market.

Price, Value and Worth Are Different

Price is what someone eventually pays. Value is the economic assessment based on the information available. Worth is what the business means to you personally.

Confusing these three concepts is one of the biggest reasons expectations become unrealistic.

The Foundations of Value

Professional business valuations may use different methodologies, but buyers generally focus on a common set of fundamentals:

·       Maintainable earnings rather than one exceptional year

·       Quality and reliability of profit

·       Growth potential

·       Risk

·       Strength of management

·       Customer diversity

·       Lease security

·       Systems and documentation

·       Condition of plant and equipment

Why Two Similar Businesses Can Have Very Different Values

Imagine two engineering businesses producing identical annual profits.

Business A relies entirely on the owner, has one major customer and outdated systems.

Business B has a capable management team, diversified customers, documented procedures and a secure long-term lease.

Although profits are identical, buyers will usually pay more for Business B because the future appears less risky.

Graham’s Tip

Owners often focus on increasing profit. That’s important, but reducing risk can be just as valuable. A dollar of reliable profit is worth more than a dollar of uncertain profit.

Common Adjustments

When preparing a business for sale, brokers and accountants often identify adjustments to show the true earning capacity of the business. Examples may include:

·       One-off expenses

·       Personal expenses that won’t continue

·       Above-market owner salaries

·       Non-recurring legal or consulting costs

·       Abnormal repairs or insurance events

The Emotional Challenge

Many owners understandably believe years of sacrifice should be reflected in the sale price. Buyers respect that journey, but they invest based on future returns, not past effort. Accepting this early leads to more productive negotiations.

Broker’s Desk

One of the most satisfying conversations I have with clients is explaining that value can often be improved before the business is marketed. Sometimes relatively small operational improvements create a noticeable increase in buyer confidence and ultimately a stronger sale outcome.

Preparing for the Next Stage

Once you understand what drives value, the next logical step is improving it.

The next chapter focuses on practical actions you can take over the coming months to make your business more attractive, reduce buyer concerns and maximise the value you’ve spent years creating.