There are many different reasons why business owners decide it’s time to sell. It could be a desire to cash in on your investment and retire, to move on to a different phase of your professional life, or just because a great opportunity presents itself.
By Bruce Hakutizwi
One thing that remains the same in all these situations, though, is the desire to sell your business for maximum profit. After all, you’ve put your blood sweat and tears into this concern for years. You deserve to get top dollar for all your hard work.
Or do you?
Reality is, while there are many factors that go into determining the value of a business, your opinion isn’t one of them. But, opinions do matter. Specifically, the opinions of your prospective buyer.
As with every other purchase human beings make, the final decision is as much an emotional decision as a practical one. If you can convince a buyer’s heart that buying your business is the right thing to do, their head will require less convincing, and they’re less likely to insist on a lowball offer.
What’s the conventional wisdom regarding business valuation?
Just about any reputable source of information on selling a business is going to lay out some of the basic factors that go into the value of your business:
- Current accounts payable and accounts receivable
- Value of existing inventory
- Value of hard assets (vehicles, equipment, real estate)
They’ll make wise, common sense recommendations, like:
- Clean up your premises and improve the curb appeal
- Get your financials in order
- Sew up any loose ends in terms of contracts, inspections, and other legal details
Then, they’re going to discuss various valuation strategies and formulas that experts generally use to come up with a figure to put in their For Sale ad:
- Start-up cost
- Multiplier by sales
- Multiplier by profits
- Asset or adjusted book value
- Discounted cash flow
And, all of these are legitimate, practical ways of determining what a business should be worth to a buyer. There’s nothing wrong with these factors and formulas. They do a great job of appealing to a buyer’s head. But, if you’re looking to maximize your business sale profits, there’s more you should be considering:
What really drives business value?
There are a number of factors that will affect the value of your business because they lean more toward the emotional side of the equation. They impact how the buyer feels about what your company is worth. And these important factors don’t get nearly enough attention:
- Growth potential – Buyers want to know your business can maintain its growth trend. They may identify potential in anything from the number of qualified leads you’re bringing in, to sales in the pipeline, expansion opportunities, and more. The point is, they want to feel confident that any success you’ve already had is going to be easy to duplicate.
- Stable customer growth from multiple sources – Being able to prove your business can connect with leads across a wide spectrum of platforms or locations can boost business value dramatically. Wide market appeal is not just a practical means of achieving ROI, it also feels really good for the new business owner who’s starting out on top of the world.
- Solid vendor and supplier relationships – If you have good relationships with the vendors and suppliers you work with — particularly important for retailers and restaurants — you can help your buyer hit the ground running with quality contacts, ensuring no interruption in business. This adds tremendous value because they’re heading into a potentially risky situation as part of an established, winning team instead of striking off on their own.
- Demonstrated history of repeat business – If your business model successfully encourages repeat business, you increase the lifetime value of every customer. This type of growth hacked model is very appealing to buyers concerned about long term customer retention, and it does wonders for their confidence in healthy cash flow projections.
- No history of legal disputes (including branding issues) – It’s always worth extra money for a buyer to be able to confidently step into their new role without worrying about any skeletons coming out of the closet after you leave. If your company’s history is free of legal quicksand, it’s going to be more valuable in the eyes of a buyer. Likewise, if your brand is untarnished when they take it over, it’s worth far more than if your company name brings a bad taste to peoples’ mouths.
- Well-documented processes and systems – The easier it is for the new owner to start earning revenue, the more value they will see in your business. This is the beauty of franchising, but even a private sale with no franchise license can still include detailed documentation that helps the new buyer slide into their role seamlessly.
Since these factors increase the value of your business, it stands to reason that trying to sell a business that’s seriously deficient in any of these areas would result in a lower valuation. Rather than encouraging a prospective buyer, boosting their confidence, and getting them excited, these emotional triggers will have the opposite effect.
So if there’s room for improvement, take the time to do so before putting your company on the market. And, if your business excels in any of these areas, make a point of letting prospective buyers know about it.
When should you start boosting your business value?
You should begin taking positive steps at least a year before you actually plan to sell, because ignoring these factors until closer to the sale can leave you without enough time to make a difference. By putting these tips into practice a year or more out, you should have plenty of time to establish them as integral parts of the business.
Bruce Hakutizwi is the U.S. and international manager of BusinessesForSale.com, a global online marketplace for buying and selling small- and medium-sized businesses. Bruce manages business development, account management, content building, and client acquisition and retention in the United States, Canada, South Africa, and Europe. He frequently writes about entrepreneurship and small business ownership. Find him on Facebook, Twitter, and LinkedIn.