There are many ways to value a business but the simplest way is to come up with a multiplier which you apply to the net profit generated in the previous financial year. The actual value of a business (and valuation methods) varies very much from industry to industry but there are key characteristics that most buyers will look for. If you keep these in mind, you’ll maximise the value of your business over time. If any of these are out of kilter, it’s worth considering how you will fix them.
The model
Imagine your business is a machine. You put X in the front and Y comes out the back. If your model is sound then by increasing X, Y increases too. Buyers will also look at the trends. Some businesses can grow revenue by putting in more effort but profit doesn’t grow. A buyer will want evidence that your model has the ability to be grown and replicated successfully otherwise they will find it hard to get their return on the purchase price. Your model should also be simple to understand because if it sounds too complicated then it might scare buyers off or at the very least reduce your business valuation.
The database
The size of your database is very important. A buyer will want to be able to access your pool of prospects and customers. They may be happy to continue selling what you sell but a buyer may also be interested in your business because they have something else to sell to your database. One business that we are aware of had sales of less than $1m but sold for over $10m because they had a large database of blue chip clients that was attractive to the buyer. Many small businesses don’t keep good prospect records. Just because someone doesn’t want to buy today, doesn’t mean they aren’t future customers. Also, buyers will often want to survey your customers to check satisfaction levels.
Relationships
Do you have a good relationship with your suppliers, staff, landlord etc. and are these relationships clearly documented. A buyer will always play ‘devils advocate’ and hand-shake agreements do not have value. Anything that can be easily taken away will reduce the value of the business. Make a point of documenting your relationships as it will be one of the first areas examined during due diligence.
Accounts
Your accounts need to stand up to major scrutiny when you sell your business particularly if you’re selling a company and not just the assets of the business. A smart buyer will examine every aspect of your accounts. If it’s a big transaction, they might even go down to individual invoice level to check your figures and they’ll look for patterns. Trying to ‘fatten the pig the day before market’ i.e. ramping up sales artificially around the time of the sale will only cause mistrust and doesn’t work. It’s like only brushing your teeth a few days before going to the dentist! If your accounts are a mess or it’s hard to tell your household accounts from your business accounts, now might be a good time to straighten that out.
Dependencies
Does your business require you to work around the clock to function? Is it dependent on a key person who could be hard to replace? If this is the case, your valuation will be affected. Nobody wants to buy a job let alone a job that is hard and time consuming. If you’re not paying yourself a commercially competitive wage, a business valuer will reduce the value of your business because the buyer won’t get someone to do your job for your wage.
Growth and consolidation
Does the business have other opportunities to expand? If a buyer pays you four times your profit then logically it will take them four years to get their money back if nothing changes. Most buyers will want to grow the profit either by looking at new opportunities or by absorbing some of the functions of your business into theirs to reduce costs. Business owners often spend a lot of time talking to us about what doesn’t work but you must be able to talk about what does.
So, how does this apply to you?
Why not take 10 minutes out of your busy schedule to find out what you can do to maximise the value of what is one of your most important assets. You might be very surprised by some of the simple steps you can take now that will pay off in the years to come. Simply call 1800 632 907 and ask to speak to a consultant. You’ve got nothing to lose – it’s free.
