In this past year, we have twice made offers for purchasing consumer product businesses. In both cases, I was surprised by the perspective that each owner had about how much their business was worth, based on the amount of time they had invested in it. It seemed so irrelevant to me.
Each of these opportunities came about because the owner was winding down in their physical capacity to keep up the pace. Both were 100% DIY propositions. That means the owner did all the sales, all the fulfillment or delivery, all the marketing, all the inventory planning, all the order taking, etc. One even made the product himself.
Both businesses had also provided some form of income for the owners many years. Both businesses provided one low wage job; a job that required someone to wear a dozen hats, but, still only one job.
When we evaluated the businesses and looked at what had been accomplished from the outside, it was not very much. The businesses had ebbed and flowed with the capacity of the owner. When the owner took an extended vacation, the business suffered. When the owner did a trade show, the business had a mild upswing. When the owner failed to do enough follow-up, the business sank back.
The results these businesses had created over some many, many years, were not encouraging. Sales were declining as a result of the owners realization that they had reached their limit on DIY. The bottom line (profits) was non-existent, partly because the business had been run more like a personal checking account and partly because the overall income was so low.
When we made our offer based on results, both sellers found our offer grossly low because it did not come close to paying for “all the time” they had put into their business.
A business is not valued by how much time someone has put into creating it. Accomplishment is the best internal and external measure of both. In both cases, the owner was able to create a living for themselves all those years, a job being self-employed. How much would anyone “pay” to buy a job?
As a business owner, I get the expectation of paying for results. Having been a wage earner, where I do what is asked of me and the result is someone else’s responsibility, I get that understanding, too. As we all work to grow our businesses, we need to be very conscious of how many ways we can create the appropriate results and expectations for all involved so as not to be simply doing work on a daily basis because it’s there. I can move a pile of dirt from one area to another indefinitely and get paid a wage. As a business owner, I need to be laser focused on ensuring that moving the pile of dirt is the most valuable thing I can be doing with my time, and then finding someone to do all the other things, while I move the pile, or just get someone to move the pile.
Just because work exists in a business does not mean it needs to be done. Staying focused on the highest priorities is critical to increasing the value of your business, and your life.