Most entrepreneurs spend all of their time managing their business as a place to work. They never think about how much their business is worth as an asset until they're getting ready to retire. As a result, they forfeit decades of potential value creation and never enjoy the wealth that they could have generated.
Business value and value-based management are foreign concepts for most business owners. They typically rely on glib assumptions ("a business is only worth what a willing buyer is prepared to pay") and simplistic rule of thumb estimates (e.g. turnover x some industry multiple). Their decisions are almost always based on short-term operational needs, not long-term value creation.
Therefore, it should come as no surprise that business value is central to our upcoming Ownership Wealth & Freedom course. If you don't understand how much your business is actually worth, then you can't take any purposeful action to grow its value. And if you aren't actively growing the value of your business, then you're leaving your financial future to chance.
So how much is your business worth?
Ultimately, the value of any asset is contingent on the earnings that it creates for its owner. Unfortunately, many business owners conflate ownership earnings with employment income. Even if you're earning a lucrative salary, you're still selling time for money. Would you be satisfied paying someone else the same salary while you earned nothing despite retaining your ownership share?
A business can't create ownership wealth without cash, so free cash flows are the ultimate indicator of business value. This is why simplistic estimates, like turnover- and net asset-based valuations, have to be taken with a generous pinch of salt. It doesn't matter how many sales a company makes or how impressive its balance sheet looks. Until it starts generating surplus cash, it's unlikely to be worth very much.
A discounted cash flow valuation is well beyond the capability of most entrepreneurs. However, by using net profit as a reasonable proxy for free cash flows, we can calculate a decent indicative valuation. Simply multiply your net profit by a number between one and six that reflects the degree of risk in your business (we cover this in much more detail in Ownership Wealth & Freedom).
In our experience, the vast majority of business owners never get compensated for their risk and investment. It is tragic that so many of them feel guilty about paying themselves a good salary, let alone declaring a dividend. They are owners in title, but employees in reality.