What is the valuation gap when you sell a business?

Why the gap happens

Most owners work out the value from the profit they see each year. A buyer looks at it a different way. They ask, "What's left once I pay someone to do what the owner does?"

If you run the quotes, the big customers, the team and the phone, all of that has to be paid for. That cost comes off the profit before the buyer works out a price.

Then there's the risk. If the business leans on you, a buyer worries the customers and staff will walk out the door with you. More risk means a lower offer, or a deal where you have to stay on for years.

How the sums can play out

Here's an example. These are made-up numbers, not a valuation.

An owner has a business turning over $4 million. He says it makes $600,000 profit. But he works 60 hours a week in it and pays himself very little. Once a buyer pays a manager to do his job, the real profit is closer to $250,000. Because the business leans on him, the buyer also pays a lower multiple of that profit.

He had $3 million in his head. The offer comes back around $625,000. That's the valuation gap.

How to close it

• Get yourself out of the seat. Hand over the quotes, the customers and the day-to-day calls.
• Write your systems down, so someone else can run the business from an operations manual.
• Clean up the books. Keep personal costs out, and get monthly numbers you trust.
• Start early. This takes years, not weeks, so start well before you want to leave.

Questions owners ask

Who works out what my business is worth?

A business broker or a qualified valuer. I don't do valuations. I help you build a business that's worth more when they look at it.

Is the valuation gap the same for every business?

No. It depends on how much the business leans on you, how clean your numbers are, and what's written down. The less it needs you, the smaller the gap.