At ED-M, we speak to dozens of business owners every month who are walking around with the same question. What is my business worth? It seems like a simple question, but in practice it turns out that many entrepreneurs over- or underestimate the value. Especially in medium-sized businesses, I often see that value is determined based on feelings. And that feeling almost always deviates from the market.
In this post, I illuminate a common misconception. The idea that profit is the most important determinant of value. Of course profit plays a big role, but in the current market one factor appears to be much more decisive: transferability.
The most important question for any buyer
A buyer doesn't just look at today's numbers. He looks primarily at tomorrow's predictability. That means that the central question is whether the business can continue to run the same way without you as an entrepreneur. We call this transferability. And that factor remarkably often determines the deciding factor in negotiations.
Let me cite a recognizable case study. Last year we counseled an entrepreneur in the business services industry. Results were strong, revenue stable and margins healthy. Based on the numbers, the value could be about one and a half times what the market was ultimately willing to pay. The reason was clear. The entrepreneur arranged virtually all customer relationships himself, made the most important offers and set the course. Objectively, much of the value lay with him personally, not in the organization.
Three signs that transferability is too low
In our practice, we always encounter the same three signs.
1. The entrepreneur is the center of sales and customer contact
If customers call you instead of the business, that is a risk for a buyer. Continuity hinges on your presence.
2. Processes exist primarily in the mind of the entrepreneur
Undocumented processes or dependencies make a business vulnerable. Buyers want to see that the operation is reproducible even without you.
3. Team and management are not sufficiently independent
A strong second echelon increases value. A team that only executes but does not manage actually lowers it.
What does it pay to take action now
Those who improve portability in a timely manner and make their businesses "sales-ready" see this reflected immediately in their valuation. Businesses with clear processes, stable customer relationships and an independent team structurally leave for higher multipliers. Often even with equal profitability.
There are plenty of hijackers on the coast. Serious buyers are happy to pay more for security.
