One day a few months ago I was meeting with a client who is a senior partner at a law firm. He's in his 50s, and all of the other partners are around his age or older, so they're starting to think about what they'll do with their practice in the future.
My client said he figured that if he wanted to sell his share of the business, it was probably worth X dollars.
"I can give you a closer estimate," I said. "Right now, your business is worth zero."
He looked at me as if I'd lost my mind--until I explained how he could bring the value way up.
If you're the entrepreneurial brain behind your company, or in my client's case, a professional practice, think about what gives your business value: you. It isn't difficult to quantify your revenue, earnings, debt, and your tangible assets such as real estate, inventory, and cash on hand. But it takes time and effort to measure the value you've created through all that you know. The point I made to my lawyer client was this: Without a valuation for all of the human capital you've brought into the business, who is going to write a check if you decide to sell the business tomorrow?
Now, there are two ways to look at the value of your business, each of which depends on what you want from it in the end.
First, you might have a solo practice that you plan to run until you retire, close the door, and walk away. I call this a lifestyle practice. It's more like having a job, though it's a job you created, and when you leave it has no value other than the assets you've accumulated and maybe your computers and office furniture, minus depreciation.
The second way, however, is to view this as a business that you want to sell eventually, or turn over to a successor when you retire, or a business you hope will continue as a family legacy long after you're gone. In that case, from Day One--or at least from today forward--you should start assessing the value of all that you bring to your business from day to day. That way you can reap the benefits in a sale or acquisition, or keep the value intact when you step down.
Your list should include the following 5 key intangibles:
1. The expertise you bring
What skills, accomplishments, awards, and special talents make your business unique? Who can you groom to deliver the same skills, or build on them?
2. Your contacts
Keep a directory of your clients, investors, board members, employees, contractors, suppliers, consultants, colleagues, and your social contacts. All of your relationships can play a role in what you do.
3. Brand and reputation
What makes customers value your business? What have you done to establish brand recognition and loyalty? Have you created a social media presence? Have you sponsored events? What does your brand represent to those who know about it? Does it stand for a position on certain social issues, for example, or a role in the community? Have advertising and marketing efforts paid off? What has worked the best? What hasn't worked?
4. How you do business
Create a manual that describes your systems and practices. Lay out how you do everything from ordering supplies to your accounting system to working with your clients. Show how you've developed processes that you can replicate over and over again, so that you can teach these processes to a successor and he or she can repeat them seamlessly. This should be a living manual so that you can keep refining it. Be self-critical. Keep looking at how you can make your processes work better, keep upgrading and documenting what you've done.
5. Your success story
Document a history of what you've done, especially how you've handled challenges. For example, how did you handle that last economic downturn? Did you put more emphasis on advertising and marketing? Did you cut expenses? Everything you do to help your business succeed--and every lesson you learned from a mistake-- is part of a story that will be of value to the next owners.
My client is still working hard, but he'd like to make it possible for his family to sell the business if, God forbid, anything should happen to him. That's why confronting the value of your business is so vitally important; you want to know what your options are and be prepared. That way you and your loved ones won't be in for a nasty shock if, on the eve of your retirement, you find out your business is worth nada.