What’s My Business Worth?

I was talking to a friend of mine the other day—someone who also owns a business in our industry—and he confronted me with a question that enters the minds of all business owners of a certain age and tenure.

He asked me, “Jerry, what do you think my business is worth?”

I didn't bat an eye:

“How long do you have?” I responded.

Where to Start When Valuating Your Business

What I told my friend was that his question was a loaded one. There are dozens of variables that can affect the valuation of a business in our industry, and you can’t entertain one variable without entertaining them all. However, I’ve come to learn that there are many owners like my friend who—through absolutely no fault of their own—aren’t quite sure which variables to prioritize in their business valuation.

For owners who may be new to evaluating a business, I like to start the conversation by focusing on a few critical variables.

1.      How long have your customers been with you?

The length of your customer relationships is one of the biggest factors to consider when putting a value on your company. These customers have a lifecycle. While the length of that lifecycle may vary from business to business, one principle typically holds true no matter what: The younger the customer relationships, the more valuable the business. Why? Younger relationships represent greater upside. These customers have fresh investments that still have room to grow and evolve as needs change and opportunities arise—especially if you're a business with the ability to cross-sell solutions like unified communications as a service (UCaaS) or cybersecurity (more on this below). Most times these customers are also still under contract. In contrast, aging customers have likely already reached their peaks and are in the final stages of their vendor agreements.

2.      What’s your product mix?

We’ve all seen how demand for technology has shifted toward cloud-based “as-a-service" solutions like Microsoft Office 365. For this reason, acquisitions-focused companies are going to be looking for opportunities to cross-sell other products and services into an existing book of business. For example, we have purchased a few legacy conferencing businesses that have tremendous upside to sell UCaaS and Connectivity into those customer bases.

Sellers with a UCaaS portfolio, in particular, are hot on buyers’ radar. The most recent Gartner report clocks UCaaS at only 12% market penetration in North America. Based on that statistic, the UCaaS market’s barely been touched at all, which raises the value of any business that offers UCaaS. I’ve even seen businesses get 3x higher valuation based solely on the fact that they have a UCaaS portfolio.

3.      “Where are your eggs?”

Another important variable is how much revenue each of your customers is responsible for. I’ve seen extremely motivated sellers with excellent profit/loss statements see their valuations plummet because 60% of their income comes from a single customer—too many eggs in one basket, so to speak. What happens if that customer leaves or scales back their investment? That’s too much financial risk for a buyer to take on. For this reason, I urge every business to consider whether they’re overleveraged with any of their customers before getting too far down the valuation road.

4.       What percentage of your customers are under long-term contracts?

Buyers are also going to look at the length of your customer contracts. Are customers only tied to you on a month-to-month basis, or do you maintain longer 24- to 36-month contracts? You’re probably going to get a higher valuation if the bulk of your customers are on longer committed contracts. Again, a buyer’s going to be thinking in terms of risk, and if every new month creates an opportunity for a customer to cancel, they’re going to be less comfortable investing in your business.

5.      What are the terms in your carrier contracts?

Your relationships with carriers are an X factor that can work for or against your business valuation. Bottom line: Your business is less valuable if the carrier can turn off the revenue faucet whenever they please. Do you have evergreen language with no stipulations to truly protect long-term income? Has a reputable attorney that understands our industry represented you in negotiating the contract terms? This becomes evident when looking deeper into the terms and conditions. The devil’s in the details when it comes to carrier contracts. This is one of the biggest reasons why it helps to forge a strong partnership with your buyer. A true partner will work with your carrier partners to re-negotiate contracts and get you the best terms possible, which can dramatically increase your valuation.

I don’t think my friend is unique or exceptional. I think there are a lot of leaders who own businesses and are considering selling for one reason or another. My hope in writing this article is that it provides these folks with the insight to take the next step, whether that’s a conversation with a prospective buyer or further internal number-crunching. The process of selling a business can be complex, but it’s not impossible—especially when you have the right guidance.

If you have questions beyond the five variables I’ve listed above, please drop me a line—always happy to chat about acquisitions strategy with other leaders in our industry!