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BUSINESS VALUATION

My Company Has No Value. Does Yours?

A family cruise vacation helped this entrepreneur see that he's not building a sellable business. Here's how.

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When I got back from vacation last week, I was kind of depressed. But not for the reasons you may think.

I took a Royal Caribbean cruise to Bermuda with my family. Royal Caribbean is a most excellent cruise line, which I highly recommend. Just don't linger too long at the buffet or you may get trampled by a herd of human elephants attending a family reunion. And avoid the pool area during peak times. Whoever said the human body is a beautiful thing never went on a Royal Caribbean cruise from Bayonne, New Jersey in July.

But this is not about the cruise. It's about my business, which is not as great as I thought. It's not as valuable either. 

My Business Is Not Run Like a Ship; It Depends Entirely on Me

I sell business software and technologies, primarily customer relationship management (CRM) products to small and medium-sized companies. The company makes a little money from sellng that software but, most of the profit (yes it's profitable) comes from selling services--training, customization, implementation, integration. I earn a decent living. My 10 employees are compensated well. I serve a few hundred clients, and dole out a decent amount of work to contractors. The company has been around for almost 20 years, too, so no complaints there. But is my company really worth anything? If I were to sell it today, who would buy it? What would I get for it? Have I built up something of value? Or am I just kidding myself?

Based on the cruise I just took, I'm kidding myself. Why? I spent too much time running my business from the boat.

For six days I was constantly pulled away from the buffet line and royal bingo to answer emails. And while on land at Bermuda I found myself talking on the phone instead of drinking rum swizzles. I had to answer questions from clients. I had to resolve problems with a few people. I had to authorize a payment to a contractor. I had to "approve" a quote that had to be "delivered" that week. I had to talk to a larger prospective customer who just couldn't wait until I got home. I had to sign off on a new contract. I had to reply to messages and respond to voicemails.

A Lack of Systematized Processes

Now you may ask why. Why would I do this? Why can't I just take the week off and deal with these things when I return? Why can't I take a vacation with my family and put all my business responsibilities aside? Here's why: I'm running a business--a service business. The model is built around responding to clients quickly. And that's the reason my business is not very valuable at all. I don't have a system to do this. I don't have an infrastructure. I don't have a process. I have just, well, me. The whole company is built around me. And if something were to happen to me, then my business would fall apart. Fast. Hell, I can't even go on vacation for a few days without things started to come undone at the seams. And I'm not just talking about my pants. I've built a fiefdom around myself. I've created an asset with no value at all.

A truly valuable business functions without the business owner. It is an entity that can live on its own, at least for a while. There are internal controls and repetitive ways of doing things. There are manuals, processes, and procedures that people follow. There is an organizational chain of command. Managers are empowered to make decisions independently and without the business owner breathing down their necks. The perfect example, as illustrated so brilliantly by Michael Gerber in his iconic E-Myth books, is a McDonald's franchise, or even a Royal Caribbean cruise ship. Everything is set out in such a systematic way that cooks, housekeepers, maintenance staff and even managers can come and go and the business (or the ship) will keep humming away because, with just a little training, a new person can be inserted into the process. The wheels of the machine don't come off. That's how every business should be. That's how my business should be.

No Fixed Assets; No Recurring Revenue

OK, my balance sheet isn't bad. I've got some cash and investments and receivables due from clients. My payables are relatively low and I've got no debt. But that's it. I run a service business. There's no inventory, no fixed assets, no buildings, no equipment. Backed by nothing. And besides the net value of my cash and receivables what would a potential buyer pay for my 20-year-old company with hundreds of "clients"? Not very much. At all. Because buyers don't pay for the past. They pay for the future.

I don't have service contracts or maintenance agreements or commitments from clients to purchase more at some later date. In other words, I have no guaranteed revenue stream. Most of my clients may be happy with the services I supply, but there's plenty of competition and no client is making any promises. No guaranteed revenue stream means no chance that a potential buyer would pay a multiple of earnings. Because what are the guarantees that this revenue will continue in the years to come?

A Buyer Wants a Business That Thrives on Its Own

My clients are free to go anywhere they want. If I were to disappear or a key employee were to leave I would lose many of them because of the severed relationship. So a potential buyer would be forced to hire me as an employee to keep those relationships going for a few years, or at least until the buyer could establish its own. That's expensive. And that would come right out of the purchase price. Buyers don't want to do this. They want to absorb their acquisitions with a few key people but then they want to manage it themselves. The last thing they want is to be dependent on the former owner. 

But it is. Why? Because I'm afraid to take the chance. I'm too lazy (and fat, thanks Royal Caribbean) to gamble on the amount of money and time it would take to hire and place the right people in the responsible positions they should be in and give them the autonomy to make decisions about my business and, most importantly, my money. So instead I carry on. I run everything myself. I continue to be a control freak. And I earn a decent living. But I'm not building a company. Just an income. And when I disappear, be it by a bolt of lightning or another Royal Caribbean cruise, I'll continue to suffer the consequences of running a business that has no value.

Last updated: Jul 17, 2013

GENE MARKS is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.
@genemarks




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