Wednesday, September 11, 2013

Gene Marks: Why Business Is Worth So Little

A guest post by Gene Marks

I’m still (relatively) young, so I don’t want to sell my business.  Also, I have optimistic hopes for the economy over the next few years and this may be a good period for me to earn a few bucks, particularly after all the past slow years.  Yeah, I’m definitely not going to cash out.  But these are not the real reasons why I’m not ready to sell my business.  The real reason is this: my business isn’t worth very much.

Is yours?

Sure, I’ve got plenty of customers.  But none of them are under a long term contract so there’s no guaranteed revenue stream.  And, being a service business, I don’t have many assets.  I’ve got cash and accounts receivable and that’s worth something to a potential buyer.  I have no debts and my payables are low, so that’s also a good thing.  But I don’t have any real property or equipment, except for a few computers and some office furniture.  Maybe your business has a better balance sheet than mine.  Maybe you’ve got a lot of equipment that has a good resale value.  Or a warehouse full of inventory.  Or long term contracts, or a big building with a low mortgage.  If you do then good for you.  Those are all hard assets and they all have value.  So you’ll definitely get a price for those.

But that’s not a business.  Those are just assets.  Each one of them has a market value.  They can be sold off as a group or individually.  You’ll hopefully get more than what you paid too.  But you’re not going to get what your business is really worth unless you build up a business that’s really worth something.  One that can stand on its own.  That’s the mark of a truly valuable business.

Take a McDonalds franchise, for example.  Now that’s a valuable business.  Sure, there’s equipment and property and hard assets.  But there is also something else:  a process.  If you own a McDonald’s franchise your employees know the process.  Everyone knows their job, from the manager down to the fry cook.  There are procedures to follow.  There are written manuals.  And rules.  If the fry cook leaves then you replace him with another fry cook who gets trained accordingly to those same procedures.  You buy from the same suppliers under established, long term contracts.  You have the same procedure for selling products to your customers, one that minimizes time and maximizes output.  Heck, even if your manager ups and leaves you can find and teach another manager.  You’re just inserting that person into the system.  It’s like a machine with replaceable parts.

Is your business like that?  Can you disappear for a week, two weeks, three weeks and it just keeps running?  Do you have a system in place?  I don’t.  If I were to get hit by a bus tomorrow my business would fold up within weeks.  I have no procedures or policies.  I’m a micromanager.  Everything needs to pass through my hands.  Every job is different, every project unique.  If someone were to buy my business they would need to also hire me along with it.  Who else would keep things running until the new owners could establish their own mark?  This is not value.  This is just another excuse for employment.

I’m not complaining, mind you.  My business is doing well.  And it’s been growing.  For the past twenty years my company has provided a livelihood for me and my family.  It has been a source of income and support for my employees and contractors.  But besides its cash and receivables it’s really not of any value to anyone.  Is yours?

Gene Marks writes daily for The New York Times and weekly for Forbes, Inc. Magazine, Huffington Post and Fox Business.  He runs a 10 person consulting firm outside of Philadelphia.