Why Is Business Value Important
You may be sitting there reading this, wondering why I feel it is important to let you know why business value is important. Doesn’t everyone know how important business value is?
Well, you may very well be right; however, I do feel it is important to stress the importance of value at this point.
The world is changing. It has changed. There are things going on in the economy, governments, industry and demography affecting the value of our companies. I feel it is necessary to outline why I think Business Value is important and what has motivated me to start my consulting practice.
Once you have read the following I expect you will also realize the significant challenges we face ahead and the importance of ensuring our companies offer the most value so we can get the highest price for them.
Most people are aware of the Baby Boomer phenomena. Most people are aware of the impact the aging population will and has had on our medicare, our pension funds, on leisure activity and the sale of depends. However, are you aware of the impact this aging population will have on the supply and demand for business acquisitions over the next 10 years?
If you are like most small businesses, you are likely thinking to yourself “Hey, I have a good stream of cash flow, and someone will want to buy it in the future”. The demographics suggest differently.
It is my belief, and I will explain further about how I got to this, there will be more businesses for sale and fewer people in a position to buy them in the future! In short, supply and demand of businesses for sale will benefit the buyer, not the seller. This will put pressure on the seller to offer the most value to get the best price.
Here are some facts. There are 7.4 million small/medium-sized business in the US and Canada. These are business with payroll and have revenue less than $75 million. There is another 30 million non payroll small business I am not even including.
The population of the working age in the US and Canada, defined as being between the age of 25 and 69, is just shy of 200 million.
Here comes the fun part. Here are some assumptions, some are right and some are blatantly wrong. First, I am going to assume as a result of the current economic conditions, the number of small/medium-sized business in Canada and the US has not grown over the last 3 to 4 years. I will be using the reported figures as if they are the current state in 2012. I am also going to assume the number of small business will grow at the pre recession level per year over the next 10 years, which is around 2.5%.
Another significant assumption is, I am considering all the population between 25 and 69 to be part of the labor force (I know this is wrong). As we look into the future, I am simply moving along the age brackets without adding to the total population as a result of migration. This means in 5 years, anyone currently bracketed in the 25-29 year bracket will be considered to be in the 30-34 year bracket.
And, the most significant assumption is, I am assuming small/medium-sized business ownership is held on a prorate basis, based on age of the total work force (again, this is a big wrong assumption). That is right. I am going to assume since 40% of the population is between the age of 50 and 69 years of age, only 40% of the business are owned by this age group.
Plain and simply I know my assumptions are wrong. I know the result I get from making these assumptions is wrong. However, consider my assumptions. Would you say there is more or less small business owned by people over 50? Do you think 25 year olds own small business more or less than their share of the population?
7.4 Million Small Business’s
41% of population 50 <> 69
33% of population 35 <> 50
3.0 Million Small Business’s will need to be sold over the next 10 years
23 buying age per sale
8.6 Million Small Business’s
45% of population 50 <> 69
32% of population 35 <> 50
3.9 Million Small Business’s will need to be sold over the next 10 years
18 buying age per sale
Even though I know my assumptions are wrong, the number of small businesses will continue to grow and the size of the population older than 50 will continue to grow. This means 10 years from now there will be 30% more businesses needing to be sold to a smaller group of buyers.
This is why building the most value into your business is paramount right now. By doing so, you should be able to get the highest price compared to the other 3 or 3.9 million business on the market.
Copyright 2012. Bruce Everitt. All rights reserved.
Bruce Everitt, a CFA® charterholder, is the Principal of Willo Consulting Group, and specializes in increasing business value for small and medium businesses around the world. www.willoconsulting.com
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