It’s a given in the financial industry that small business owners are unrealistic when valuing their companies. The owner who knows the true value of his business is the exception rather than the rule. Unfortunately, not knowing how much the business is really worth eventually creates problems – big, hard to ignore ones.
One of the biggest problems occurs when owners want to grow and need outside capital to do it. Owners who want debt/venture capital to generate growth have to know and be able to prove 2 things. One is the actual, not perceived, value of the business (tech not withstanding) and the other is the company’s ability to pay the money back.
Whether raising money through investors, creditors or both they’re going to want to see hard, reasonable numbers based on revenue, profit, physical assets, receivables, contracts (current customers) and letters of intent (future customers). It is naïve and unrealistic to expect the process to be different.
And yet, owners do it all the time, because most of them don’t recognize they’re acting on emotion rather than logic. They believe they’re being rational, but they aren’t, which is where the problem starts.
Although they don’t see it this way most owners are emotionally attached to their businesses, as they should be. Many financed their own start-ups through personal money/credit, family and friends. They worked hard and sacrificed to achieve success, eventually providing a better future for themselves and their families.
Their initial hopes and dreams were realized and they feel good about it. They want to take the next step and get outside capital to continue that success – seeing the application process as a continuation of their needs, desires, hopes and dreams (emotions), rather than a business transaction (logic).
Overwhelmingly, small businesses owners expect to get growth capital based on future speculation, rather than the current worth of the company and its ability to repay the money. They want to continue to take chances and bet on their ability to make their dreams come true, not understanding when the bank doesn’t. However, for every level a business grows the old cliché – it’s not personal, it’s just business – becomes more and more applicable.