“Slavery is dead, I can’t sell you,” is a statement I often made to business owners who wanted me to help them sell their businesses when I was a business broker. You see, one of the first things that a business broker needs to determine is the value of the business that he is about to list. As a rule of thumb, small businesses generally sell for three to four times the economic benefit that the owner gets from the business. By economic benefit, I mean salary, dividends, and personal expenses that are charged to the business. Determining that is straightforward; however, the need for the business owner to be personally involved for the business to succeed clouds the picture.
Many small business owners are very good at delivering a service or producing a product. In fact, they may do it better than just about anyone else that they know. In an effort to profit from their expertise, they started a business. For many, the number of other things that they were responsible for such as marketing, finance, and HR was surprising. But, they managed to get reasonably good at these business activities in addition to performing the services or producing the products that got them into business in the first place. Their realization that they didn’t have a business often comes when it is time for them to leave. That is they find that while they thought that they were in business in actuality, they were self-employed.
What is the difference? Isn’t being self-employed just working in the business that you own? No, the difference is much more profound. My definition of a business is, “A business is a profitable system that delivers products or services to the marketplace at a price the marketplace is willing to pay, without you.” Self-employed individuals have wrapped the legal and practical aspects of a business around their own personal performance. Their business cannot operate effectively without them. Their business is not a system but is built on the competence of key personnel including the owner. This brings us back to my opening statement, “Slavery is dead, I can’t sell you.”
A real business can be sold; however, if the owner is integral to the success of an organization since the owner cannot be sold, only a small portion of the business is capable of being sold. The value of a self-employment enterprise is much less than that of a business true business that produces identical revenues. For a number of these enterprises, I hate to call them businesses, the value is just the furniture, fixtures, equipment, intellectual property, and customer list. Since the owner’s personal efforts were necessary for its operations, the company’s value is it liquidation value not its value as an ongoing enterprise.
The motto of this is clear. When you start or acquire an enterprise, make sure that it is a real business. Remember the definition, “A business is a profitable system that delivers products or services to the marketplace at a price the marketplace is willing to pay, without you.” Establish job descriptions for all jobs in your enterprise even if you are filling one or more of them. Document all processes and procedures: how sales are made, how the brand is built, how money is accounted for, how billing is handled, how the products are made or services delivered and so on. Periodically, test to see whether your enterprise is a business. If you cannot take a two-week vacation without experiencing a major decline in revenue, you do not have a business. If you could not open a second location without you personally being there to run things, you do not have a business.
Self-employed individuals, don’t be discouraged. Just get busy and build your business.