Posted 01-15-2015 1:28 pm by
Surveys show that over 75% of small business owners do not know how much their company is worth. Knowing the value of your business is essential from valuing a buy-sell agreement during a partnership dispute to those considering the potential sale of their business.
Business valuation is a complicated process that can involve a number of factors such as:
• Years in business. How long have you been in business? If the business has only been established for one year, the value may not be there for potential buyers and the bank financing the purchase. As a general rule, buyers and banks like to see an established company that has been in business for a while.
• Good financial records. Some business owners do not keep good records, which can dramatically harm the value of their business during the sale. Buyers and banks depend on accurate and up-to-date financial records in making their decision, and tend to shy away from businesses that do not have good records to show.
• Good customer records. Do you have a good customer list complete with name, phone number, address, e-mail, purchase history, etc.? Having a customer list may not be as important for a drive-through espresso stand, but it can be very important for an auto repair business. Consider this: business buyers want to be able to obtain your customer list, market to your existing customers, understand the demographics of your existing customers, and find new customers that fit this criteria. Having good customer records allows potential buyers to purchase your business and grow it.
• Location. Having a good location is especially important for businesses such as restaurants and retail establishments. This usually means being located on a busy road with good signage, sufficient parking, and traffic patterns conducive to people driving into your parking lot.
• Visual appeal. If the business performs services at the client’s location and clients usually do not come to the business’s premise, having good visual appeal is less important. For businesses where the clients come on-site, it goes without saying that having an immaculate and beautiful premise is essential.
• Profitability. In larger merger and acquisition transactions, the buyers may care more about the revenue or the number of users that visit the web site or use the app. In other words, these strategic buyers purchase the business to fit a particular business strategy, whether it is buying out a competitor or reaching a new market segment. For smaller business sales, the buyers are usually individuals who are quitting their jobs to become business owners, and they need the money to live on. That is to say, the bottom line profit, rather than the top line revenue, becomes crucial in the buying decision.
• Franchise or independently owned. There are buyers who feel the training, brand name, and proven systems offered by the franchisor give them the tools and confidence to succeed. Having that said, many times the franchise royalties equate to a manager’s salary. In other words, it can be more difficult for the buyer to hire a manager and become an absentee business owner if much of the revenue is used to pay the franchise royalty fees.
• Industry. What are the trends of your industry currently, and how do these trends fit into the larger picture of our current economy? Businesses tend to fetch higher valuations when the industry in general is on the upswing. During an economic downturn, businesses in more stable industries such as CPA firms and doctor’s practices tend to become more attractive.
• Competitive advantage. One of the tenets of marketing is having a unique selling proposition, or USP. How do you compare with your competitors? What is the competitive advantage of your business? The greater your competitive advantage, and the harder it is for others to copy you, the higher valuation your business can get.
• Seasonality. Some businesses are highly seasonal, which can result in large variations in cash flow from month to month. With the proper education, business buyers can become receptive to highly seasonal businesses. As a general rule, however, buyers like companies with predictable and steady cash flows that come in like clockwork (think insurance companies).
• Value of equipment and inventory. The amount of equipment and inventory in your business may affect the way it is priced. In cases where the value of the equipment is worth more than the value of the business, it may be more profitable for the owner to simply liquidate the equipment piece by piece. The amount of inventory can also affect how buyers view your business, since inventory is typically not included in the asking price of the business, and buyers need to come up with additional funds to purchase your inventory.
• Owner operator or absentee owner. Wouldn’t we all want to sit back, relax, and watch the cash roll in? A well run business with solid systems in place where the owner is minimally involved can be a turnkey opportunity that is very attractive to potential buyers. Businesses with owner operators can still sell well. It is a matter of presenting it in the right way to the right person at the right time.
• Growth and expansion potential. It goes without saying that business buyers want a future that is brighter than their current situation. If your business has plenty of growth and expansion possibilities, it may just appeal to the right buyer who is willing to pay you handsomely for it.
Given the number of factors to consider when valuing a business, it is often difficult to give an instant quote when people ask: “How much is my business worth?” An experienced business broker with a solid understanding of current market conditions can help you determine the realistic value of your business.
Aaron Muller is a business broker in Washington State who has sold over 120 companies and facilitated over 40 SBA loans for his clients. Contact Aaron at (425) 766-3940 to inquire about selling your business.