Why Having Exceptional People Could Make Your Business Worth $0

One of the most common ways people exaggerate their success is by basing their net worth based on the value of the business they own.

For instance if the business makes $100,000 profit and it's based on a 20x earnings multiple (the same as a 5 cap rate in real estate) then they would say their business is worth $2,000,000.

The majority of the time, this is a false assumption; not that businesses in that industry have sold for 20 times earnings, but that it's likely that their business isn't sellable at at.

Here's why the value of most people's businesses are worth $0 above their hard asset costs.

Simply put: The owner operator is the work horse.

They are the ones with the skill, expertise, work ethic, temperament, dedication. The success of the business requires them to be in the company.

Even if the prospective buyer did have equal skill as the current owner, that's not the game of business people who acquire businesses. They don't want to buy a job. They want to buy a fully operational business where all they have to do is change the ownership and buy the companies profit stream. From there they may or may not implement strategies to improve that business from mainly a decision making role.

How you know you have a sellable business:

The business is not run by exceptional people and it is still very profitable.