Having investigated and worked with many small business owners, and having been one, and having discussions with business brokers, too many times business owners have inflated ideas of what their business is worth. There are many good tools to give you a more well-rounded valuation. The worst tools are mere multiples of revenue or EBITDA…or taken from the latest Inc. magazine article.
Too many small businesses rely on the multiples and then are shocked when an offer comes in much lower than 1x revenue, for example. The offer is usually a fraction (percentage) above the asset value of the business. Perhaps a strategic buyer—one currently in the industry, or adjacent industry—will pay a ‘premium’ over other acquirers because you have distribution channel, a product/service offering they want, talent they need or… But most buyers aren’t strategic; most offers are less than what the business owner was expecting. The indignant response of the owner usually points to the value of the customer list.
Customer lists are only worth something in the first 30 days…maybe longer if you have ‘subscription’-type services. Collectively, businesses are creatures of habit. We often order the same products and services that we have before—as long as they work—and simply renew contracts, or ‘copy over’ purchase orders. (Even as an individual, I bet you travel the same routes to/from work, buy gas at the same stations, pick a limited range of entrees from the menu of a restaurant you frequent, buy the same labels at the grocery store, etc.; businesses, a collection of individuals, are the same.) Until something nudges the inertia in a different direction—poor quality, price increase, e.g.—or wakes us from our behavioral stupor, we won’t make any changes.
One such bump in the inertia is ownership change in a supplier. Now, your customers will ask if they should stay with your product or service, or look around. That’s why customer lists are only good for 30 days.
If you’re counting on the customer relationships—for many year even—to create value in your business, please rethink that strategy. We can help. We can point you to different tools to evaluate what a non-strategic buyer would offer.