Knowing how much your business is REALLY worth presents unlimited benefits to both you and your buyer. If you are preparing to transition ownership of your business or just beginning to consider your options for stepping away from the business, it is important to be prepared and have accurate expectations about the sale price.
There are a range of factors that have an impact on the price or value of your business and listed below are some of generally the most important:
1) Type Of Business – different types of businesses (e.g. manufacturing, service companies, distributors) are hard to compare and can often generate a very different sale price. However, generally if your business has a proprietary product, special expertise, defined contracts or provides any value-addition for clients you will see higher sale prices than those business who do not.
2) Revenue Size – This one is a bit obvious! The higher the revenue the higher the selling price can be! The two go hand in hand. Recurring revenue is great. The more returning contracts or customers you have each year indicates how “safe” and “reliable” your business is, therefore adding to your businesses value.
3) Customer Base – Usually, the wider and more loyal the customer base, the higher the selling price
4) Marketing Position – A company that occupies the uppermost position in the market, or has a unique niche will sell for a premium over other companies.
5) Industry Outlook – If the outlook for the industry is positive and growth is predicted, the sale price will rise. The stage of the industry life cycle is also important. If it is experiencing a period of consolidation and larger companies are acquiring smaller ones, the price for the smaller ones will rise.
6) Depth of management and sales teams – Generally, if the business owner bears all managerial responsibility, the selling price will decrease.
7) Company History – The business’s track record is important in the sale. If you can demonstrate a history of consistent growth and profit, buyers will be willing to pay more. This also works in terms of the story of the company. A solid company history increases its tangible value.
These points listed above are all general factors that impact business value BUT there is more then meets the surface when it comes to valuing a business.
Below are three extra extremely useful points to take into consideration when selling/valuing your business!
1)Intellectual property – this can be anything from recipes to trade secrets and trademarks. These are the things the set your business apart from the rest, that give your business VALUE. This “IP” could also exists in how you run your business from your customer base or contact network
2)Business potential – Business potential is a huge game changer when it comes to business value. Perhaps you haven’t had the time, energy or motivation to achieve the maximum success of your business but the potential is there! This needs to be highlighted! The benefits of buying a pre-existing business in comparison to starting from scratch are huge and your buyers need to know that!
3)Happy customers – If you have an already developed business, it’s reputation and customers satisfaction is vital in it’s success and therefore value. Happy and satisfied customers impact your business more then anything else because they are your business! Put yourself in your customer’s shoes when running a business, solve issues quickly, chase good reviews and listen to the feedback!
To summarize, there are a several factors that will affect the value of your business and some of the most important ones aren’t seen on surface level! The best thing you can do is be prepared and do all you can do before you do place your business on the market, to obtain the best possible outcome for all your hard work.
Remember that when it comes to valuing or selling your business!
If you are considering selling your business, or just want to consider your options we can advise you about the process, discuss alternatives and assist with the sale of your business
Michele Purvis is an advisor with over 30 years experience working in the accounting and financial services industry helping clients to define and create their wealth.