It's natural to want to know what your business is worth, but it can be hard to find out.
Years ago I owned a marketing and design agency and I used to rely on the multiples the big advertising-agency holding companies got on the stock exchange. I'd assumed that, because Omnicom was trading at 22 times earnings, my little agency with $150,000 in profit was worth around $3 million.
I got a rude awakening during a conversation at an industry event when I found out that, at the time, small ad agencies with less than $5 million in revenue were lucky to get three or four times pre-tax profit — and much of it was tied to achieving goals in the future.
There are few reliable sources for finding out what your business might be worth. I found it helpful to cobble together a guesstimate by looking at three sources:
Business Valuation Resources
BVR gathers historical information about businesses that have recently sold and it comes up with some industry norms. I found BVR to be a good start, but often times its descriptions of industries were too generic to make for good apples-to-apples comparisons.
M&A firm newsletters
Some mergers-and-acquisitions firms publish newsletters that will describe the kind of multiples being paid on deals they have done. For example, when I was preparing to sell my conference business, I looked at the newsletter from the Jordan Edmiston Group, one of the top M&A firms in the conference business.
I found that the problem with M&A firms as a source for valuation data is that they tend to overemphasize their biggest deals. M&A firms get paid on deal size and spend a lot of their time trying to convince the world (and prospective sellers) they do big deals. It's also the way they measure themselves and earn bragging rights over cocktails. Unfortunately, it ensures they (and their newsletters) boast about the one deal they did with a valuation of $100 million instead of the 15 deals they did for businesses worth less than $20-million.
Bizbuysell.com
Bizbuysell.com is the largest online marketplace for businesses for sale. I think of it as an eBay for businesses. If you own a dry cleaning shop in Vancouver, you can advertise it on bizbuysell.com. Likewise, if you want to buy a retail business in the Lower Mainland, you can query bizbuysell.com by industry and identify businesses that meet your specs.
The downside of bizbuysell.com is that it tends to attract smaller, Main Street businesses — which is great if you own a coffee shop or a lawn maintenance business, but not as helpful if you own a larger, unique business.
In the end, I found that these sources enabled me to estimate our value in the marketplace within 20 per cent of the final selling price. Not perfect, but a lot more accurate than looking at Omnicom's stock price.
Special to The Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine's "Who's Who" list as one of America's most influential business-to-business marketers.