Why your business is worth less than you think

You’re probably measuring the wrong thing

If you’re like every business owner, you probably know roughly what your house is worth. You probably check the property listings in your area every few months and you know if the market is up or down. You probably also know exactly (or at least pretty close to) what your investment portfolio is worth. You track your stocks and your retirement funds.

Yet interestingly, when I ask Founders what their business is worth, the answer is very different. It usually begins with a number – “I think it is worth about R30 million.”, “I wouldn’t sell it for less than R150 million.”,

Then I ask a question that changes the conversation completely – “How did you arrive at that number?”

The answers are surprisingly similar across almost every industry I work with. Owners tell me about the 20 year journey they’ve been on. They talk about the great customers they’ve served. They mention that their turnover is over R100 million. They talk about how they’ve sacrificed everything for this business.

I completely understand those answers. I’ve heard them many times as a business coach and used them myself when I’ve owned businesses. I know the blood & sweat that goes into reaching those milestones. The problem is, that none of those factors determine what someone else is willing to pay.

This is one of the biggest misconceptions in business ownership, because:

Owners value their past.
Buyers value their future.

That single difference explains why so many businesses never sell for what their owners believe they’re worth. If you’re wondering how to value a business correctly, you have to stop looking backward and start looking forward through the eyes of a stranger.

Here’s what’s really happening

Most business owners think they’re building an asset. They believe that every new client and every extra staff member adds another brick to a valuable structure.

Many are actually building dependency. There is an important difference between a growing asset and a growing burden.

Every year the business grows. Revenue increases, the team gets larger, the office expands and the owner becomes busier. From the outside it looks like a massive success story. You’re the person everyone admires at the Saturday braai, you get invited to be on podcasts, speak at events…you’re the star of the show!

However, inside the business something else is happening. Every important decision still goes through you. Every difficult customer still wants to speak to you. Every major problem still lands on your desk. Every strategic decision still depends on you.

The business has grown but it’s dependence on you has grown with it.

Most owners never notice this because dependency disguises itself as importance. It feels good to be needed and it feels powerful to be the smartest person in the room. People say things like, “We couldn’t manage without you” or “You always know the answer.” They tell you that nothing gets approved until you’ve seen it.

It feels flattering but actually, it should feel alarming! Because every time the business becomes more dependent on you, it becomes less valuable to someone else.

This is the core issue for any founder stuck in operations. You’re not building a legacy, you’re building a trap.

Buyers aren’t purchasing your business

This might sound strange. It might even sound insulting after all the work you’ve put in.

They aren’t buying your history. At least not in the way you think. What buyers are purchasing, is certainty. Think about any investment you’ve ever made. You’re not buying what happened yesterday, you’re buying confidence about tomorrow. The same applies to your businesses.

The simple question sitting behind every acquisition is this – “What happens after the founder leaves?”

That question changes everything about your exit strategy. If customers leave with the owner, the value drops. If key staff leave because they only followed the founder, the value drops. If profit disappears because you are not there to make every decision, the value drops. If nobody knows how the business actually works without you whispering in their ear, the value drops.

Notice something interesting here? None of these issues are financial, they’re structural. Most valuations are reduced long before anyone opens the financial statements. They’re reduced because the buyer sees risk.

Risk always attracts a discount. If you want to know how to sell a business for a premium, you have to remove the risk of you leaving. You need a business operating system that survives your absence.

Revenue is one of the least interesting numbers

This surprises many business owners who have spent years chasing the top line. They proudly tell me their turnover has doubled in the last 3 years. I usually congratulate them because that’s a significant achievement, especially in volatile markets and volatile times!

Then I ask this question – “What became easier?”

This is often followed by a long silence. Yes, revenue has doubled but stress has doubled, headcount has doubled, complexity has doubled, working hours have doubled and freedom for the owner has disappeared.

This isn’t unusual in business. Many founders are struggling with growth because they’re scaling their own exhaustion.

Here’s the key point – revenue measures activity, business value measures quality. They’re related but they’re not the same. A buyer would rather purchase a business producing dependable profits through efficient systems, than a larger business held together by an exhausted founder / partners / executive team.

That’s why impressive revenue figures often fail to produce impressive valuations. High turnover with high owner involvement, is a job that nobody wants to buy. High profit with low owner involvement, is an asset…that buyers want.

The pattern nobody talks about

After years of coaching business owners I’ve noticed something that I rarely hear discussed in boardrooms – founders slowly becoming employees of their own success.

It happens so gradually that you barely notice the transition. In the early years you do everything because you have no choice. You’re the salesperson and the cleaner and the bookkeeper.

Later you continue doing everything or being involved in everything, because you’ve never learned another way. You’ve never built the systems required to step back and eventually, you become indispensable.

Most people congratulate you (you might even congratulate yourself) on your dedication. I don’t!

Because here’s the thing – indispensability creates dependency and dependency limits freedom, it limits growth and it limits value. What’s the point of taking the risk, working so hard for so many years and not being able to achieve maximum value when that sell moment arrives?

The irony is extraordinary. The harder the founder works to keep everything together, the less attractive the business often becomes to someone looking to buy it. If you’re looking for a business coach for founders stuck in operations, the first thing we look at is, how to fire you from the daily grind. We want to build a business that works without you, to ensure that your payday after years of hard graft, is worth it.

Businesses don’t become valuable by accident

There’s another misconception worth challenging. Owners often believe that valuable businesses simply emerge after enough years of hard work. They think that if they keep grinding away, one day a buyer will appear with a check for R100 million.

They don’t. Business value is designed. It’s an intentional act of engineering.

Every system you document increases confidence for a buyer. Every capable leader you develop reduces the dependency on your brain. Every decision delegated appropriately, increases the resilience of the business. Every customer relationship owned by the business instead of the founder, increases the final sale price.

None of these changes happen by chance. They happen because someone intentionally builds a business that can survive without them.

That is the distinction you need to make today. Some owners build businesses while others build businesses that happen to employ them. If you want to know how to make a business run without you, you have to start treating your business as a product you’re building for a future customer.

Remember, you value your past, buyers value their future.

Here’s the test I prefer

People often ask me how to value a business. They want formulas and multiples. I think there is a better place to begin that conversation.

Imagine you disappeared for 90 days. No phone calls. No emails. No meetings. Nothing.

What would happen to your business?

Would sales continue at the same rate? Would the leadership team make decisions confidently without checking-in? Would customers remain loyal to the brand? Would the profit continue to hit the bank account? Would the business keep improving while you’re gone?

Or would everything pause or slow down dramatically until you returned?

This quick exercise reveals something far more important than a valuation multiple. It reveals how much of the business actually belongs to the business. If the gears stop turning the moment you stop pushing, then you don’t own a business. You own a very demanding job that you can’t leave.

If you want to build a business of any value (that has a real multiple number you can bank and live happily ever after on), you have to pass the ’90 days absent from your business test’ first. In other words, building a business that can run & grow, without you.

The goal was never to sell

At this point you might be thinking that this doesn’t apply to you. You might be thinking – “I never intend selling my business. I want to leave it to my children.”

Good, that is a noble goal. However, that isn’t really the point of what I’m discussing with you.

The greatest benefit of building a sellable business, is not selling it…it’s owning it.

Businesses with strong leadership create more freedom for you. Businesses with dependable systems create less stress for everyone involved. Businesses with healthy and predictable profit, create more options for the future.

Businesses that operate independently allow you to think strategically. You can focus on the big picture instead of constantly solving operational problems. In other words, the characteristics that make a business attractive to buyers, also make it super enjoyable to own.

That’s the insight you might be missing. Exit planning isn’t something you begin 5 years before retirement. It’s a way of building a better business from the beginning. It is about creating a self running business that serves you.

Stop asking what your business is worth

There’s a different question that produces much better answers for your growth. Stop asking what your business is worth today and ask a more difficult question.

“Why would somebody want to own this business instead of me?”

Do you notice how different this question makes you feel. The conversation immediately changes from vanity metrics to structural integrity. Now you begin thinking about leadership. You think about systems and culture. You look at customer loyalty and recurring revenue. You evaluate profit quality and decision making. You look at management depth and predictability.

Those are the things buyers actually acquire. The purchase price is simply the outcome of those variables. If you want to know how to step back from business, you have to focus on these foundations first.

A different definition of success

For years I thought successful businesses became larger. I thought success was measured by the number of offices you had or the size of your fleet.

Those were the days…I don’t believe that anymore.

Here’s what I believe (and you should too) – successful businesses become stronger by developing stronger systems, recruiting stronger leaders, generating better profit, fostering a stronger culture and achieving independence for the founder.

These strengths eventually create something every founder wants, even if they never use it and that’s ‘choice’.

The choice to step back whenever you want. The choice to take six months away to travel. The choice to bring in investors to take it to the global stage. The choice to pass the business to family with confidence. The choice to sell for a number that actually reflects your hard work.

‘Choice’ is the real measure of business quality. Here’s the most interesting part about ‘choice’ – the businesses that create the most choices for their owners, are almost always the businesses that buyers want the most and like with any demand, when things are wanted the most, that’s when price goes up.

So perhaps the real question was never whether anyone would buy your business tomorrow. Perhaps the better question has always been about what you’re building today.

Because if you build a business that creates confidence without you, value takes care of itself. However, if you build one that depends on you for almost everything, no valuation formula in the world can hide that reality for very long.

Ready to stop being the engine and start being the architect of your business? Let’s have a conversation about how to build a business that gives you the freedom (& payday, if you decide to sell) that you deserve.

 

About John Creighton:

For the past 30+ years, John has started, built & scaled businesses.

He has successfully exited 3 start-ups (one sold to a JSE listed Company) and achieved a Top 10 place in South Africa’s Top 100 fastest growing Companies.

Today, he helps ambitious entrepreneurs and leaders build better, more focused and more profitable businesses. With a reputation for clear thinking and practical execution, he helps his clients navigate complexity, elevate performance and achieve exceptional results.

To explore how John can help you take your business to the next level, get in touch him today by email or book a free 30 minute consultation