Most entrepreneurs have unique businesses. So how do you know what makes your business more valuable to future owners or investors? What are your organization’s key assets? I recently started working with a client who has a strong consulting business and is trying to decide what his business is worth. He got a call out of the blue from a potential buyer who is interested in the business. Now the challenging part begins to determine what the business is worth today and why is it worth that.
There are four main assets buyers assess in deciding a consulting business’s worth. I break them down so we all can decide what the business might be worth if he chooses to sell. It’s funny that now he got the call of the lifetime, he has to decide what his lifetime investment is worth. How would you respond if you got this call? His first response was to give me a call. Wise choice, I would say, but hey, I’m biased. More importantly, I’ve been through this before with similar consulting practices.
The first value point I look at is the tangible assets in the business. Since he owns a consulting firm, he has several offices and office equipment, an inventory of training materials, and, of course, his team of professionals. For many consulting businesses, their office locations are critical assets to evaluate in the buying or investing process. We will see more about this in our future blogs.
Now, we move on the second value point, the intangible assets of the business. He has strategic partnerships with several key technology partners. He has long term contracts with these partners. He has a number of copyrights and trademarks around his intellectual property. He has a well-established brand, and, of course, he also has several trade secrets and know how. These assets are harder to define but still easier to assess than the next two assets we look at.
The third value point is an asset class called intangible competencies. Now were getting into the secret sauce of his business. This begins adding in the intellectual capital of the business. This third group of assets include distinctive and core competencies. It also includes business processes, procedures, and routines including several unique sales and marketing systems that support extended business growth. He has developed internal training processes and structures that allow him to attract many of the best and brightest associates in his markets on a regular basis. Well over 50% of the business’s value may lie in this part of the business. His consulting business is not that different from many other consulting practices. Most of his intangible competencies lie in the people and the systems in which they are working. The new owner wants to know they have this part of this business under control and documented. It also may mean that he has to consider what key employees need to know if he decides to go ahead with the offer and how he helps retain them to continue creating value for the new owner.
The final value point of his hidden assets in his company are its latent capabilities. This is why my client called me. He wasn’t sure how to evaluate his business to include these unique strengths. These capabilities include his spending his career building his organization’s leadership team and their direct reports. He has attracted and retained a high caliber workforce over the years. He has a number of key strategic alliances that keep his organization at the forefront of his industry. You can learn more at How Can Strategic Alliances Help Your Business Grow? His business is in an emerging technology market that changes the way we live our lives.
He gets many new opportunities because of his reputation in the market. He has developed a reputation for being the go-to person when it comes to certain key organizational challenges. He has been able to fund significant R& D efforts over the years and has several new products in the pipeline that could be big winners in their respective markets. Finally, he has created a sustainable business that will continue beyond his leadership of the organization. These are all latent capabilities.
So how do you assess the value of your business? How much time would you spend on understanding the final two asset classes? How much of your business’s value is based on these intangible competencies and latent capabilities? How do you get the most money for your business and your life investment?
Now that we have shared the several key components of business value, we begin the discussion of how to get the best deal for our businesses. See you here next week when I begin sharing a blueprint to what you need to know about how a potential buyer evaluates your business’s value. I think the secrets we share will help change your life forever.