As famous business consultant/author Dr. Stephen Covey wrote in his best-selling book, The Seven Habits of Highly Effective People, you must “begin with the end in mind.”
An important component of your exit strategy is to know how much your photography business is worth at any point during its life. If your exit strategy is to retire at a certain age, and sell your business, then you must determine, at the very least, an approximate future value for your retirement financial planning. If you expect to use the proceeds of the sale as part of your retirement income, then you better know how to calculate a realistic value.
The other important reason to know the value of your photography business is that life takes strange twists and turns, so you may have to exit and/or sell your business earlier than you planned. You may become disabled, experience a family financial crisis or, believe it or not, decide to pursue a different career in the future, before retirement.
Calculating the value of any small business is tricky. The bottom line, however, is that it is only worth what someone will pay for it. Various internal and external factors could make it worth more in ten years and less in twenty. It’s important to understand this principle because small business owners tend to have a deep, even emotional, connection to their business. To many of them, it is priceless. The hard reality is that, on average, small businesses are less valuable to a future buyer than their owners perceive them to be. Learn this lesson early, so you won’t be disappointed in the future and, more importantly, discover you don’t have enough money to retire.
Various sources for this article stated that the “typical” formula to calculate the value of your business could be equal to or twice, three times or more of the total annual profits. For example, your balance sheet shows that your business generates $100,000 in annual profits. It could be worth $100,000 or more than $400,000.
The business valuation industry uses a list of descriptive statements to match with an actual business to assist in determining the correct multiplier. Two of them seem to apply to many, if not most, photography businesses.
· “An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success.” If this describes your business, then it could be worth two, three or four times your annual profits.
· “A small, personal-service business where the new owner will be the only, or one of the only, professional-service providers.” This statement also describes a photography business; and if it is more accurate than the first, the business’ value is equal to the annual profits it generates every year, or a multiplier of one.
There are equally credible professionals in the business valuation industry who think a multiplier is an inaccurate method. They say that a future buyer of your business, if he or she were smart, would be more interested in how profitable your business would be if he or she were operating it, instead of its profits under your ownership.
This group of professionals advises that a small business is actually worth a discounted amount (in the range of 20 to 30 percent) of annual sales. The specific rate can only be determined after a thorough investigation of the business, both today’s financial performance as well as future performance. These deeper factors could include how many contracts are in force and for how long, the business’s dependence on a few large clients or a narrow market of prospects, and how you determined your projections of revenues, expenses and the need for more space, staff and equipment.
This range of advice from the business valuation professionals is another reason why it is so important to know how much your photography business is worth. You’ll probably have a range of answers, but that is better than no answer. Even with a wide range of values, you can still plan for the future, and develop exit strategy scenarios that match the different amounts you might receive when you sell your business.
What would you do if someone walked into your photography business tomorrow and offered to buy it, and asked you how much it was worth? Being able to give that person a credible answer, with little or no hesitation, may be all the impetus the buyer needs to make you a great offer on the spot. Fail to answer that question with confidence and you could watch the best outcome for your exit strategy “exit” your business.
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Recommended Reading:
- 2013 Photographer's Market: The Most Trusted Guide to Selling Your Photography
- Best Business Practices for Photographers
- The Fast Track Photographer Business Plan: Build a Successful Photography Venture from the Ground Up
- Group Portrait Photography Handbook
- The Best of Family Portrait Photography: Professional Techniques and Images
- 500 Poses for Photographing Group Portraits
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