Business Valuation, Do it Before You Have To

Business Week has a "small business" area on their website, though it's not usually the best location for comprehensive vs. glossy knowledge. However, a recent article on business valuation by Jeremy Quittner (dated April 16) is quite good and comprehensive in describing the best ways to value your business. I leave it to you to hit the link so you can read it for yourself.

My beef is that folks usually wait for a crisis to hit before performing a valuation, i.e. when a sale is to occur, a partner is leaving, etc. From a value maximization perspective, the time to do so it is not right before you want to sell it, rather it's after you've had a chance to address the issues and clean up the cash flows. You generally fix up your house before putting it on the market, no?

The article mentions CPA's, business appraisers, and business brokers as possible valuation experts. Appraisers have the best tools and knowledge for the job, I would endorse them over the other two.

Think of Your Exit Before You Enter

Exit strategies - how do you make the most from your business when you want to do something else or retire? To a great extent it depends on the type of business you've built, and the market you compete in. In today's market the most active buyers are the growing web companies like Google that pay up for niche businesses that augment their business model. A great majority of companies that are sold are bought by competitors, rather than going public. Recently, a start-up launched about 10 years ago "became" exit-able.

Local Harvest is a focused website that maps sustainable restaurants, farmers markets, grocery stores, and the like. It is a niche business in an area where some big folks are playing, notably Google Maps, which of course didn't even exist 5 years ago. If Local Harvest can succeed in gathering and holding both locations and the customers looking for these locations, then the recent mega-wave to sustainable foodstuffs will drive it's value exponentially, and make Google, Mapquest, or Yahoo take notice and think about a bid.

Now I know most entrepreneurs don't start a business looking to sell it, and these guys probably didn't. Successful businesses are driven by passionate people who really find a market to serve. But if you were starting a business from scratch today, or revising your business, it wouldn't hurt to focus now on who might want to buy you later.