Business Value Is Based on Numerous Factors
So what’s my business worth? Every business owner getting ready for sale invariably asks this question pretty quickly upon meeting with us. Pricing is a tricky aspect to selling your business; price it too high and it won’t sell, but under price it and you might leave money on the table. To get a credible number, analysis of financial records, performing several types of valuations and considering multipliers is the most effective way to gauge fair market value.
A fair market valuation analysis establishes a reasonable range of business value. This valuation range considers a number of value drivers, including:
- History / trend of Revenues
- History / trend of Cash flows
- Size of Cash flows
- Working capital requirements
- Marketability of the business (is there a ready market, or limited buyer universe)
- Degree of Competition
- Ease of entry into the business
- Industry trends
- Growth opportunities for the business
- Unique assets (differentiators like people, processes, licenses, exclusivity agreements)
- Age and quality of physical plant and equipment assets
- Location and Facilities (will a new owner need to inject additional capital to modernize)
- Amount of risk (e.g., heavy seasonality, customer/supplier concentrations)
- Motivation and Flexibility of the parties
- Comparable Sales Data
- ROI and income objectives of buyers
What’s For Sale Exactly?
One of the first questions that Mission Peak Brokers determines is what exactly is for sale? Is there a great deal of assets (tangible and intangible) or will the business be sold via a stock sale. Will the buyer need working capital or will accounts receivable be included in the purchase? Will the buyer assume equipment leases, or will you deliver the equipment free of liabilities? If they assume a lease, will that represent partial payment of the sale price? Does your business have non-producing vehicles, equipment or inventory? If so, could you dispose of these assets without reducing the value of the business? Does the sale include real estate? Does your business represent the highest and best use of that property for the next 10 years?
What’s Your Unique Selling Proposition?
What differentiates your products and services in the minds of customers? Are there sustainable competitive advantages? Does it have a protected market niche? What are your company’s proprietary intangible assets? Examples include recipes, patents, registered trademarks, documented and institutionalized know-how, custom software, customer lists, etc.
What are the barriers to entry for this type of business? Examples include high capital investment, tight labor market, exclusive supplier relationships, franchise rights, one-of-a kind location, long-term customer contracts, etc.
How dependent is the business on you? Generally, the less critical you are to the operations of the business the better. What happens when you go on a vacation — total enjoyment or mayhem when you come back? If it’s the latter, than it behooves you take effective actions to minimize/eliminate your involvement.
What happens when key employees leave? Will they take the customers, suppliers, and know-how with them? Do they have a financial incentive to stay with the company? Enough said.
Who Are Your Customers?
How much of your business do your top customers represent? High customer concentration is a major risk that reduces the price buyers pay. How does one grow their business, and what are the risks to future earnings and growth? A business is worth more if it has clear growth opportunities and a written growth plan with specific strategies and financial projections.
Do you require payment in cash, or are you willing to be paid over time? Generally speaking sellers who provide a substantial percentage of financing receive more for their businesses. One reason is simply supply and demand. A higher initial investment to purchase your business (down payment, working capital and transaction costs) reduces the buyer pool and therefore demand. Also, seller financing attracts buyers because they assume there is less business risk if a seller has the confidence to finance. What is the trend and stability of sales and earnings? How much working capital does the business need to operate? How is the business performing relative to its industry? High value indicators include clear and consistent financial reporting, positive gross margin trend, high and increasing cash flows, and low working capital.
How Do I Get Started?
What’s my business worth? Certainly the right time and effort to figure out the right number to get your business sold. Selling your business successfully involves answering questions for a qualified, objective advisor who can provide you with a credible and reliable estimate of value. Acting hastily with your business valuation will likely yield negative results. Fortunately, there’s no need to squander your hard-earned financial reward.
Curious about your business value? Contact Mission Peak Brokers for your complimentary business valuation.