Why Do People Keep Asking For Numbers? What If You Just Have Assets Or Intellectual Property?
When selling a business, your main selling point may be the potential of the business, or some software or other asset you’ve built, it may be the reputation of the business or it may be that you see value in your unique idea itself. But when you speak with a business broker or any other M&A professional they invariably want to start with your turnover and your last year’s profit figures!
Do you find that frustrating? I often come across people who get exasperated at the usual questions they get when what they’re selling is something slightly outside of the usual business for sale and/or they don’t have great numbers.
There are three reasons why professionals want to start with the figures:
1. They sell established businesses and they sell those businesses based largely on the profit the business is generating. So they are geared to talk turnover and profit.
2. The first information that buyers ask for are the numbers so anybody tasked with finding you a buyer is going to want to start with the numbers.
But, most importantly,
3. The type of people who don’t have great numbers are business owners / entrepreneurs who think they have something of value but who own something that, despite the owner’s convictions, is going to be extremely difficult to sell and unlikely to realise anywhere near the value the owner thinks it has.
Potential is a four letter word to buyers. It’s the excuse word. It’s the word that people use when they don’t have solid proof (numbers) to back up the value they see in their business. Potential is highly subjective, the opinion of the entrepreneur about the potential is generally insanely biased on the up-side. It’s not worth the investor’s time to get into explaining to the owner why his own rose-tinted view on potential is completely unrealistic.
What about the value of your idea? If it’s a killer idea and likely to make millions why won’t people start with that? Ans: Because, again, someone who expects money for an idea generally has no idea how business works. An idea itself is worthless. Most investors have half a dozen ideas… and that’s before breakfast. An idea is less than 1% of the value of the business. The other 99% is the hard graft involved in converting the idea into a viable business.
But what if you have assets? Now, this is interesting because investors will pay for assets. But they need to be solid assets, not intangibles like brand, reputation etc. Most buyers aren’t interested in acquiring a business simply for the brand or reputation. If the brand is a really valuable one then the business would be able to charge a high margin for its products and this would result in healthy profits. No profit? Then there is likely no value in that brand (even if it is well recognised locally or in the industry). The proof of the pudding is in the eating. If you have a valuable brand or reputation, that value needs to be reflected in the numbers.
Which brings us full circle. If you don’t have attractive numbers then it’s going to be extremely, extremely difficult to sell your business (or idea, or brand). And that makes it an unattractive proposition for business brokers or corporate finance firms.
The objection I get at this stage is usually to quote examples like Facebook which sold for huge sums, figures completely disassociated from the level of profit they were making (or not making). Explaining this needs to be left for another day, but the short answer is that the valuation methods used for large companies, market leaders etc. bears no relation to that used for businesses in the sub £10m market. They are attractive to buyers because of their size. If you don’t have the size then you need to have nice numbers.