“While in a big company one bad hire is an issue, in a startup it can spell the difference between success and failure.” Eric Ryan, co-founder of Olly.
Substitute “small business “for “startup,” it’s the same thing. It’s a point many people don’t understand and some business owners prefer to ignore. A hiccup to large corporation is a disaster to a small business, which is why small businesses are valued so much differently than large firms.
If a machine goes down at Boeing nothing much changes. If a machine goes down at ABC machine shop it can be a crisis, create overtime situations, and delay deliveries (and the ramifications of irritating customers on a just-in-time schedule).
This is why valuing a small business is so much more than just the numbers. When I’m asked, “what’s the multiple (of earnings) for this business or industry?” my standard response is, “I don’t know. Let’s discuss the specifics.”
I want to know about the customers, dependencies (is the owner the only person who truly understands how to price jobs?), capital expenditures, and the employee base’s capabilities.
And this also applies to the numbers. Are the financial statements accurate, how do the ratios compare to industry averages, is the business checkbook an extension of the owner’s personal checkbook, is the company skimping now to show more profit at the expense of the future?
It’s the little things that define a small business and its value.
“Humor is what happens when we’re told the truth quicker and more directly than we’re used to.” George Saunders