Is Your Business Worth Investing In?

The effect of the recession

The recession has changed the competitive climate for most every type of business and it will likely remain changed for some time. No longer is it enough to simply find a growing market, hang out your shingle, and manage the business you start into success. In today’s economy, a business grows only by finding and serving customers with money to spend. But, these customers have become scarce and are much sought after by the competition. So, to acquire customers for your business, more and more, you must steal them from the competition.

Find a business idea with profit potential

To acquire customers in today’s economy, you must start with a business idea that has profit potential. And, to find that kind of idea, you must answer the following questions in the affirmative with confidence.

  1. Have you identified a substantial number of customers with a compelling need? And, are these customers willing to spend money on the package of goods and services that your business intends to sell to them to satisfy that need?
  2. Will these customers prefer the package of goods and services offered by your business to those offered by the competition?
  3. Will your business be able to create and market this package of goods and services at a profit?

Fortunately, the Internet has brought free and easily accessed resources to help you answer these questions. It then becomes a matter of systematically using these resources to analyze your industry, the competition, and your customer in order to determine whether or not your idea for a business has profit potential and is therefore worth investing in.

Evaluate your business idea

In order to assess the profit potential of your business idea; you must complete the three stages of a business concept evaluation. Each stage requires you to complete some common sense research and analysis in order to answer the above three questions and determine if your idea has profit potential and is worth pursuing. A brief description of each stage follows.

  • STAGE 1: Find the sales potential of the idea This stage has you take a look at your industry and identify challenges and opportunities. It also has you narrow your focus on a defined market area and target customer group.
  • STAGE 2: Verify your competitive strength In this stage, you will research and analyze the competitive climate for your business as well as your target customer, particularly what motivates them to purchase. You then use the results of your analysis to design an offer (a package of goods and services) that will appeal to these customers more than the goods and services sold by the competition. This stage ends by having you determine your initial promotional strategy and estimate sales based on the results of a market test.
  • STAGE 3: Evaluate the profit potential of your business idea In the final stage, you will identify a strategy for pursuing your idea for a business and estimate the expenses associated with implementing that strategy. This should give you confidence in your estimate of the profits your business will generate. It will also allow you to analyze the effect on profits of different assumptions used in making your calculations, (especially those concerning market conditions), and determine break-even points.

It is work! But, it’s worth it!

Whereas working your way through these stages might at first seem like a big investment of your time, ignoring the profit potential of your business idea can cost you much more in terms of time and money. It doesn’t make sense to plan your business unless you know it is based on an idea that shows a promise of profits. It makes even less sense to start it without an evaluation. So, unless you have time and money to throw away, it makes sense to evaluate the profit potential of your idea FIRST!

What’s My Business Worth?

Frequently, small business owners don’t stop to think about what their companies or operations are worth in value until they either get to the point of retiring and/or they have to give the business to someone else. Yet having a good perspective of what your business is worth via third party evaluation even years before the big ending, can be invaluable to helping set future direction.

A regular update of your business value in terms of fair market is critical to have in your back pocket as a business owner. Not everyone goes out in the market intending to sell their business every day, but that doesn’t stop businesses from being approached out of the blue when they are perceived as successful by bigger players. This situation is especially common in today’s tech markets. Then, of course, the question is how to respond to the offer? How about if an investor wants to get in on the action? What’s a fair value of ownership in trade for investment?

The BBC America cable channel has a wonderful show on each week named Dragon’s Den. The concept is that people who are looking for investors get a 15 minute pitch to four or five venture capitalists to sell their idea. Invariably, the VCs if they like the product offer investment for an ownership stake. The VCs have a very good idea what is a deal to them and what constitutes a waste of time. And, frequently, the people making the product pitch have no idea what their product is really worth in business terms. That’s when the VCs walk away with a 40% ownership stake for pennies. This type of poor selling is what is referred to as the down side of being in the dark, or just having just a rough idea of your business value. If you have no clue what your company is worth, you don’t have any context for making a decision.

An investor offering $1 million dollars into a growing company worth $2 million is a 50% partner. However, if the business is only worth $1.5 million then that same investor arguably gets majority control of the company just based on the numbers. That’s likely not the original intent when seeking to take on a funding partner.

On the flip side, using a company worth $1 million with no greater than 20% ownership available to an investor, only $200,000 can be targeted for growth. It might be better to take a small business loan instead and have 100% control of ownership. With no other debt, the bank would calculate a 20% loan-to-value ratio, which is very palatable to a lender.

Clearly, the above examples offer two very different strategy directions that become apparent when an accurate valuation is performed. And it’s common for many business owners going through a business valuation for the first time to go through a rough surprise versus their expectations. Much of the difference has to do with the owner’s perceived value versus what the accounting books represent. The reaction that their hard-earned work and sweat has no mathematical value is a hard pill to swallow. That’s because the energy and time involved in owning, managing, and expanding a business does not represent a usable factor in valuation. Instead, the defining factor is how much the business can produce in sales in the future.

External factors like the economy, both local and national, can sway worth projections as well. Management experience and skill are a measurable determination. The industry health the business operations in has an impact. A poor valuation may have nothing to do with the business measured internally and everything to do with outside forces.

Additionally, the frequency of valuations can have an impact on their credibility. A value-estimation should be performed when changes that impact the business occur or are expected. This can include shifts in technology, competition, the general economy/market or all of those combined.

Since business valuations are not cheap, the implementation of one should be used when it provides the most worth to the owner in terms of usable information. Otherwise, a regular valuation review every three or four years is a reasonable rule of thumb, especially in a well-established industry.

Closely held companies must have an independent valuation of their securities and assets for ensuring the successful acquisition of a business. Look for a professional corporation focused on business valuation, litigation support and valuation advisory services. You need a company with proper knowledge, experience and expertise to understand and determine the value of a company. A good company will have strong analytical and research techniques to accurately and independently determine value in today’s demanding marketplace.

How Much Is Your Ecommerce Business Worth?

From time to time, I get emails from customers saying that they have decided to move on from having an online business and they are wondering if I can tell them how much their online business is worth.

Business valuation is a tough one and we certainly are no experts in that arena. But we do have some insights on the topic. Here are some of the factors that a prospective buyer will likely consider in determining what they will pay.

1. Customer Base

There is no question that a large and active customer base is a great asset. If you have 30,000 account holds on your website, that would likely have value to a prospective buyer. Building a customer base and continually communicating with them is an important practice on many levels.

2. Inventory

You need to consider whether you want to sell just your website or all the product inventory that goes along with it. Some buyers will be quite interested in your inventory and others will just want access to your customers.

3. Website

As you know, investing the money in a professional website as well as the time to build out all the content is significant. Buyers who are knowledgeable about what it involves to build a full-featured site will understand the value.

4. Domain Name

A great domain name could be worth as much as anything else you have to offer. Of course, you need to have a really awesome name. The market for domain names has declined from the fervor in the early 2000s, but a solid name still has value.

5. Brand Recognition

If you have been successful in building some recognition for your brand and business that will be worth a lot. If you have done nothing to contribute online and establish your brand in your industry, you likely won’t get much of a bump.

6. Revenue and Financials

As with any business transaction, the value often comes down to your financial statements. That is no different with an online business. Be prepared to show sales data and financials to prospective buyers.

7. Traffic and Search Placement

A buyer not only wants to understand your current financial position, but they are going to do their best to determine whether a business acquisition is going to grow and prosper in the future. A strong signal (assuming they are wanting to take over your website) is your site traffic trends. If your traffic is consistently trending upwards, that is an important factor.

Related to your traffic is your current search engine placement for important phrases. If you can show that you have established your website in the search engines, that can be worth quite a bit to a buyer. We all know that strong organic placement is not an overnight process!

Conclusion

One of the key elements for any successful business is a clearly defined exit strategy. Although it is very hard to determine exactly what someone else might pay for your business, we encourage you to start thinking about the factors we have listed so you have a compelling package to offer when the day comes for you to test the waters with putting your business on the market.