This article was originally published on this site

TwitterFacebookLinkedInHow Much Is Your Business Worth?  The simple answer to this question is, as much as the right buyer will pay. But asking how much is your business worth is a complicated answer with a ton of different (and applicable) answers, depending on the context. It will depend on what industry you’re in, what stage your business is in, who the buyer is, why the buyer might want your business, and so much more. Today I want to try to answer a handful of the questions I get every week – particularly in the WordPress ecosystem, where there’s been a lot of acquisition activity (and even more discussion). So if you own a plugin, or run a digital agency, you’ve likely already discussed some of this. And before we get started, can I remind you that life is poker, not chess. There’s a lot of imperfect information that goes into these decisions… How Do You Calculate the Value of a Business? First, let’s make sure we’re looking at the question the right way. Because there are a lot of ways to calculate the value of a business. So your situation is going to depend on what your company offers, how unique it is, and who the buyer is. Here are just a few: Strategic Value The company buying you needs what you bring to the table. So they’re not looking purely at your own financials to determine value. Instead, they’re also looking inside to their own organization and what they’ve spent (or plan to spend) to deliver something in the range of what you’ve already created. The opportunity cost to a larger organization can mean that defining your value isn’t only a function of your intrinsic value. If they can bring your solution into their organization faster than building it, they might see more generous returns faster. This is why I started by saying the value of your business is in the eye of the buyer. But you should remember that if this is the approach to determining your value, the buyer may also be looking at alternatives that do “enough” of a similar thing that you do. A lot of times I hear business owners talking about the specific way they do something different than everyone else, which may be fantastic in the market they’re in. But to a strategic buyer, that nuance may not hold the same value. Which means they may be able to look at a competitor that doesn’t do what you do. All of that means paying attention to what drives your buyer and making sure you’re building alignment rather than creating a contentious dynamic. Asset Value You don’t see this a lot in the WordPress space, but it’s not unheard of for a company to have assets that drive the value of a deal. When I mention assets, I’m talking about stuff that can be sold or converted to cash. I know of a deal where the seller owned real estate that was part of the valuation. In the WordPress space – plugin and agency – owners don’t normally have real estate, large equipment, or other assets. But if you’re an agency with large, multi-year contracts with multiple vendors, you may discover that this drives the majority of your value to a buyer. Revenue Value This is the one we see the most in our space. It’s the value that is created by your revenues. It’s why the most common first or second question you get from a buyer is the last couple years (or three) of revenue. A buyer wants to see what your revenue trend is like. Is it slow growing, fast growing, flat, or growing negatively. That’s going to impact how value is determined (I’ll explain how in the next section). The other question that comes up a bit later will be your earnings or profit. There’s a big difference between a company generating $1 million dollars a month with a monthly cost of $700,000 and one with a monthly cost of $100,000. Right? People Value Most commonly called an acquihire, some buyers are looking at a company because of the staff that’s in it. The value of that business may have, again, little to do with its revenue and much more with its expertise. Or at minimum, the value of the revenue is enhanced by the expertise of the staff that would come with the acquisition. So those are four different ways that your value may be considered or calculated. Other smarter people have other approaches too. But for now, let’s look at the two most common ones and see how they work. Two of the Most Common Business Valuation Methods in the WordPress Ecosystem The two most common business valuation methods in the WordPress ecosystem are revenue value and people value – not a shock since most companies in our space don’t have assets and there are only a few buyers who are strategic. Mind you, this isn’t a slam on buyers. I’m not saying they don’t have strategies. I’m saying most of the buyers don’t have an agenda in the space. Consider the number of private equity players that have reached out to WordPress companies that don’t know a lot about WordPress (other than it’s big). They are sharp folks. But they don’t have a strategic need for a WordPress company like a hosting company might. Which is why I said there are a few, but just not a ton that would use a strategic valuation approach. Calculating Value by Revenue Let’s say that you have a business that generated $1,000,000 last year. The questions are, what did it do the year before, and how are things looking this year. The first thing a buyer does is average this stuff out. If you did $900,000 the year before, and this year you’re looking at $1,200,000, they know two things.

  1. The business is growing
  2. The average revenue is trending just over $1M

This method normally takes the revenue (or potentially the earnings / profit) and multiplies it against a factor to determine the value. So the first fact above (that it’s growing) will help determine the multiple. The second fact above (the average revenue) will be the number that you multiply the multiple against. Now, software in Silicon Valley will have large multiples. Don’t anchor your thinking to that or you’ll be really disappointed. You likely won’t see an offer for 10x your revenue except on TV. I’ve seen multiples range from .5 to 3.0 for WordPress plugins. For this example, let’s assume your business valuation in this approach might have a multiple of 1.5. In that case, you might see an offer for $1,650,000. Whether you sell is entirely up to you. But some would say “no way,” to that number because an enterprising owner would imagine they could get to that number on their own in another year. That’s why understanding all of this is so important, so that you can run the numbers and see what makes sense for you. Calculating Value by People This acquihire approach is often as simple, in terms of calculation, as the previous approach. When a company wants the staff, an easy way to run the numbers is to take a value ($100,000) and multiply it by all the staff (yes, another multiple dynamic). If your team is 8 people, you might see an offer for $800,000. Of course it’s never exactly that way, because a team often has several different kinds of roles on their team, and a single number won’t work. But you get the point. And there’s a larger point I’m trying to make… There’s not one perfect way to determine a business’s value There’s not a single way to calculate your business’s value. A team of 8 people, all of whom are developers, may be worth $200,000 x 8 = $1.6M in one calculation, and be worth $2.3M via another ($850,000 * 2.75, for a fast growing plugin company). That’s why there’s always a conversation that needs to happen. And when you have that conversation, you’re likely going to discover that there’s more to the valuation discussion than just a few numbers. So far I’ve made it sound like you grab a couple numbers, multiply them, and you have a business valuation. But that’s not true. There are several dynamics that also come into play. What factors should you be aware of when placing a value on your business? Two companies can each have the same number of employees and roughly the same revenue, and they still won’t be worth the same thing. We haven’t talked about liabilities and complexity. Liabilities How did you get your business started? Is there a loan or some other financial instrument that a buyer needs to take into consideration? Or maybe you had a couple of hard months and put that on your credit card. Is there debt that has to get factored into your valuation? When calculating how much your business is worth, it’s not just the upside (revenue and profit) but also the cost-side of the equation that has to be looked at. And that’s only one factor. The other is less one thing, and more a collection of factors I call complexity. Complexity No two companies are ever the same. And sometimes where they differ is critical to a buyer. Like I said, it’s not one specific thing. It’s a host of dynamics that end up placing the “complex” label on the deal. These days, in the WordPress space, companies have remote staff. That’s not complex. But imagine that each remote person owned their own business and to buy your company, the buyer would have to make 8 different acquisitions in 8 different countries (assuming 8 employees in remote locations). That might be considered complex. These days there are international countries where the entire team is located in one country, but the customers are often in another. And that’s not super complex. But the complexity of the money trail may be super complex, depending on how it’s done. You can see where I’m going, right? One dynamic doesn’t flip the “complex” switch, until it goes far enough, and then it does. Here’s one that has nothing to do with international dynamics. Imagine owning a recurring revenue business that buys another business. And until now, you’ve never had employees in a particular state. But now, the company you’re buying puts employees into that state. Did you guess? Yes, now the buyer has nexus in that state and likely has to charge tax to all of its existing customers, simply because of where the new company they’re buying is located. That introduces cost to the deal, right? And hence, no two companies are alike. Valuation is based on tons of little factors as much as the big factors we’ve looked at. And there’s one last dynamic to tackle. Your Business Value at Different Stages in its Growth Let’s say your business is did $100,000 in 2019. In 2020, you did $150,000. That’s 150% growth! Triple digit growth is something to be proud of – congrats! Let’s let’s imagine that 2021 is also looking good. Now here comes the “but.” Triple digit growth is easier on a company doing $100,000 as compared to one doing $10,000,000. What that means is that your valuation may differ because of the stage of growth your business is in. Multiples won’t be the same for a company that did 150% growth on 100k, verses $10M. And some buyers may want to wait a bit to see if the triple digit growth continues in years 3 and 4 before making an offer. Where Can You Sell Your Business? There are several places where you can list your business or put it up for sale. Here are three that you can go check out:

Of course, those aren’t the only ways to sell your company.

I’m sure any of us are happy to talk more about your business valuation. Sign up for free content. People still do that. Thousands of folks (7000+) regularly get my posts in their inbox. For free. Sign me up! We won’t send you spam. Unsubscribe at any time. Powered by ConvertKit TwitterFacebookLinkedIn