“Two Businesses Walk Into the Marketplace”: A Tale of Unexpected Business Valuation
How two similar businesses earning the same can have very different business valuations.
Imagine this: two businesses stroll into the bustling marketplace, seemingly identical twins. Both nestled in the same industry, the same community, boasting the same number of years in operation, identical gross revenues, and even similar EBITDA last year.
Let’s say their business broker a long with a CPA looks at both business’s financials for last year. For an example, lets just say they both show EBTIDA of $500,000. Not bad.
So shouldn’t both be worth about the same on the market?
Well, here’s the punchline—despite all these similarities, they could be worth entirely different amounts!
How, you ask?
Let’s unravel this valuation mystery, one quirky difference at a time.
Vacation vs. No Vacation: The Tale of Work-Life Balance
First, meet Business Owner A, who relishes a six-week vacation each year, sailing the Caribbean without a business worry in sight.
Contrast this with Business Owner B. His only “break” was a six-week recovery from a heart attack, thanks to never taking a day off.
Business A’s operational independence boosts its value, signaling stability and a well-oiled machine that runs smoothly, with or without the captain at the helm.
Employee Interaction: The Customer Connection
In Business A, the owner has delegated customer interactions to skilled employees. Owner A spends much more time focusing on strategic growth.
Business B, however, sees its owner at the forefront of sales, personally sealing deals.
This disparity highlights Business A’s robust structure, where the owner’s absence doesn’t deter operations, thus enhancing its appeal and value to prospects looking to buy a business.
Revenue Streams: The Stability of Income
Thanks to a bit of planning a few years back folling a spirited conversation with their business broker, Business A enjoys the fruits of recurring revenues through subscriptions and contracts.
Business B lives by the hope that customers will return.
Steady income streams boost Business A’s valuation. They offer financial security. This stability protects against market volatility. Predictable revenue makes Business A more attractive and boosts their business valuation. Investors value consistency in earnings.
Reliable income increases confidence in long-term success. Steady cash flow reduces financial risks. Business A appears more resilient to market changes. Predictability helps in planning and growth. Overall, steady income enhances Business A’s business valuation.
Customer Concentration: A Risky Business
Business A boasts thousands of customers, diluting risk, whereas…
Business B leans heavily on three key customers for 65% of its revenues.
This high concentration of customers at Business B presents a substantial risk, making Business A far more attractive due to its diversified client base. Therefore, Business A promises more stable and secure revenue flows.
Tech Savviness: Embracing Modern Efficiency
Business A has invested in cutting-edge technology and systems that streamline operations and reduce costs.
On the flip side, Business B sticks to traditional methods, shying away from tech upgrades.
This tech-forward approach not only boosts Business A’s operational efficiency but also its market competitiveness and valuation.
Brand Power: The Strength of Recognition
Business A has cultivated a strong brand with significant market recognition and customer loyalty. Business B, while reputable, hasn’t invested much in branding.
A strong brand equates to higher perceived value, adding a premium to Business A’s worth.
Environmental Commitments: Going Green
Lastly, Business A has integrated sustainable practices into its operations, aligning with growing consumer preferences for environmentally friendly businesses.
Business B has not considered sustainability as part of its business strategy.
This commitment not only enhances Business A’s reputation but also attracts a growing segment of eco-conscious consumers and investors.
Based on these differences and others, the valuation specialist trained by NACVA, came up with a value of $2.4 million for Business A and $1.25 million for Business B.
The Moral of the Joke
So, what’s the takeaway from our marketplace jest? It’s that even identical twins in the business world can possess vastly different intrinsic values. This divergence underscores the vital importance of obtaining a professional valuation that provides a full-spectrum assessment of a business. A comprehensive valuation does more than just tag a price—it deciphers the nuances that define the true value of a business.
For business owners, understanding these value drivers and getting a clear-eyed view of where you stand today can be the difference between merely surviving and thriving spectacularly. Don’t let marketplace myths cloud your vision. Get a professional business valuation and get the right answer to the question “What is my business worth?” You need to know for sure. After all, in the world of business, knowledge isn’t just power—it’s profit.
Power Action
If you haven’t had a business valuation in the last year or two, get one immediately. Make sure the business valuation analyzes your value drivers.
The marketplace is dynamic, and many of Legacy’s Tampa business brokers are eager to help.
Unfortunately, there’s a lot of misinformation out there. Nine out of ten business owners we speak with don’t truly understand how their businesses are valued.
70%-80% of businesses fail to sell when they go to market
Why should you get a business valuation now if you’re not planning to sell your business soon? The answer is simple.
Understanding what drives value in the marketplace today allows you to make impactful changes.
This can make a huge difference. Since 70%-80% of businesses fail to sell when they go to market, making these changes can be transformative. It can significantly increase your wealth and secure your family’s future. Identifying an opportunity to improve your business valuation can allow you to make changes gradually over time.
Being able to sell a business successfully is not just about you. A successful business ownership transition also benefits your employees, who keep their jobs. Your customers remain happy because they continue to receive your goods and services. Your thriving business adds value to the marketplace and your community.
Do you find yourself wondering “Can I sell my business?” Having a clear business valuation is crucial. A Certified Business Intermediary or CBI can guide you through this process. It’s not just about you, but it can make a world of difference for you when you sell my business.
Thank you – Brian Stephens