Indications of Business Value

When you are selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. It is perhaps more important to recognize when the buyer arrives at a price at which he or she will leave the negotiations. Buyers naturally try to buy the business at the lowest possible price possible, however most also have a top price over which they are probably not willing to go. Here are some of the “high value” indicators as well as some of the “low value” indicators to consider when evaluating your business.

Indications of High Value

1. High sustainable cash flow
2. Room for the business to grow
3. Anticipated industry growth
4. Competitive advantage – location, area, etc.
5. Business niche
6. History and reputation
7. Low failure rate in industry
8. Modern, well maintained facility

Indications of Low Value

1. Customer concentration on a few major customers/clients
2. Reliance on owner
3. Poor financials
4. Distressed circumstances
5. Few assets
6. Product or service sensitivity
7. Poor outlook for industry – regulations, foreign competition, price cutting, discount stores, etc.

Considering the above factors and how to address them can help a seller look at the business through the eyes of a potential buyer. A professional business broker can help the business owner sort through the many areas that buyers consider when looking at a business and trying to arrive at an initial offering price.

Many sellers make the common mistake of pricing the business too high, believing that they can always drop the price if the business does not sell on the market. Having the business sit on the market for too long is often a danger sign to potential buyers. Selling a business is very different from selling a house. It is much riskier for one to buy a business, and most buyers (which happen to be first-time buyers) shy away if they see any danger sign at all, such as a business sitting on the market for too long.

It is often a wiser choice for sellers to employ the services of a business broker to price their business accurately. When the asking price reflects the market value of a business, it is not unusual for multiple buyers to make offers on the business, bidding the price up. The initial asking price is not a number that should be determined lightly. When it comes to selling your business, it pays to do your research carefully.