Business owners decide it’s time to sell for many reasons. 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.
In all situations, the one similarity is the desire to sell your business for maximum profit.
After all, you’ve put your blood sweat, and tears into this endeavor for years. You deserve to get top dollar for all your hard work.
Or do you?
While many factors help determine 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 purchase, the final decision is as much an emotional decision as a practical one. If you can convince a buyer’s heart that purchasing 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?
Most reputable resources on selling a business state these 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 to determine a figure to put in their sales ad:
- Start-up cost
- Multiplier by sales
- Multiplier by profits
- Asset or adjusted book value
- Discounted cash flow
These are legitimate, practical ways of determining what a business should be worth to a buyer. Nothing is 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, you should consider more:
What really drives business value?
Many emotional factors affect the value of your business 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 if your business can maintain growth. They may identify potential in the number of qualified leads, sales in the pipeline, expansion opportunities, and more. They want to feel confident that your previous successes will be easy to duplicate.
- Stable customer growth from multiple sources - Proving 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 but helps make the new business owner start on a high note.
- Solid vendor and supplier relationships - If you have good relationships with your vendors and suppliers— 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 starting 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 hacker model is very appealing to buyers concerned about long-term customer retention.
- No history of legal disputes (including branding issues) -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, trying to sell a business deficient in any of these areas would result in a lower valuation. Rather than encouraging a prospective buyers, boosting their confidence, and getting them excited, these emotional triggers would have the opposite effect.
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 plan to sell because ignoring these factors until closer to the sale can leave you scrambling for time. By applying these tips for a year or more, you should have plenty of time to establish them as integral parts of the business.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.