Macro Don't Matter & Multiples are Misguided

 

I want to share something about some concerns I've heard lately about falling business valuations, and why I think often it's misguided.


Chris Wrightson - a good friend of mine and a really smart dude when it comes to buying and selling practices - publishes a regular report called the Centurion Report which is well worth getting and talks a lot about valuation trends.

It's always very popular, because who doesn't like to know what their business might be worth?

Right here and now though, there's a lot of angst around this topic. Valuations are swerving all over the place and have people wondering is it 2 times? 1.5? Less? 

I think very differently about this, and I'd like to share two conversations I've had which might explain why.

 


Conversation #1

A while ago I was chatting to one of our longest-serving program members about the impact of recent events on the broader market for advice.

He was concerned. "Are we going to see fewer people getting advice?", he asked.

I think sometimes it's easy to assume that whatever happens at a macro level will totally translate into micro effects at a business level.

The assumption is that because of all the media reporting, the knock-on is that everyone is going to have problems finding clients.

That's not to say there won't be any impact, but this assumption is flawed.

"How many clients do you need to build a great business?" I asked.

And his answer was: "80 to 100."

"Great. So you only have to connect with 80 to 100 great clients and you've got a business." I said.

He said "Yeah,"

"So, does all that's going on mean there are no longer 80 to 100 people who you could find and help big-time?

"Uh. No, I guess not. They're still out there."

Sometimes when you only focus on the macro you miss the fact that you don't need the whole world to be getting advice from you, just the right people. 

And when you focus on finding these people in your networks, understanding what they need, connecting and adding value, the macro matters less.

It's about the value you bring, not what the market is doing.

It' s kind of like Kevin Kelly's great essay on the topic; 1000 True Fans. Sometimes you've got to focus on what's going on around you instead of things beyond your sphere of control.

Sure, if you want to go for global domination eventually you're gonna have to cross that chasm from niche to mass market, but most of us aren't there (yet). We're at the place where success comes from a  focus on adding value to the people you want to work with and connecting with them.

 


Conversation #2

A while back, I had the opportunity to work briefly with an adviser called Peter.

Peter owned a practice not far from Glenorie, which is where I grew up as a kid on a five-acre block.

Peter and I did some work through a workshop program I ran for a Licensee at that time and, shortly after the program was finished, I got a call from Peter. He wanted to meet to talk about practice valuations.

When we met, I realised that he'd never actually even taken much of interest in how his business would be valued. He'd just focused on building the best one he could.

However, he'd been invited to sell, and felt his lack of knowledge would put him at a disadvantage when it came to negotiating. 

I gave him the best advice I could, suggesting that rather than starting at an arbitrary number, he needed to understand first why the buyer wanted his business.

Turns out the buyer wanted the business as a template they could apply to others.

See the thing about Peter's business is it had it all:

  • Every process was documented.
  • They had watertight agreements with suppliers and staff.
  • A clearly defined, value-add investment philosophy.
  • He'd captured all the IP in the business.
  • Clear engagement process that was hugely efficient
  • Happy staff with clear role descriptions
  • 100% of clients of service agreements

... I could go on, but you get the idea.

In the end, Peter sold that business for about $1m more than he was going to ask, and he achieved it because he'd built a great business.

The point is good businesses will always be valuable.

I mean if you had the chance to buy that business, knowing that rolling all he'd built out into your own would make you more efficient, more profitable and more valuable...

...would you hesitate?

 

 

Market business valuations will fluctuate. It's inevitable.

However, when you climb down from the macro and focus on a smaller part of the picture, certain things become clear.

Most people have more control than they realize, but the right focus is the key.

 

Right here now there's a bunch of stuff going on. It's easy to lose focus, but there are 2 things to remember.

1. If you can just focus on building out clients who know what you do, know your value and want to work with you, you don't need to worry about the millions who don't get advice. You just need to work on the hundred who you want to work with.

2. If you're worried about where the business valuations are headed, stop. Focus on building a great business. Something that you know is profitable on purpose and is built to last, and be the outlier that ignores the "trends".

 

So, that's my story. I'd love to know yours. In challenging times, sometimes it can give heart to others to know that it isn't all doom and gloom.

I would love to hear from you if you've got a story to share. Email me at [email protected] or post below.

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