Selling Your Business at the Highest Possible Price
One of the first questions business sellers have is how much do we think their business is worth. In order to give a valuation of a business, we consider many factors, not only the amount of cash flow the business is generating. One way we look at the process is through the eyes of a buyer. It’s very important to take this perspective as ultimately it is a buyer’s perspective of the value of the business that will make or break a transaction.
On December 10, 2012, Rose Stabler posted an article titled “Master Ten Value Drivers to Sell Your Business at the Highest Price.” The purpose of that article, she said, was to help evaluate a business through the eyes of a buyer, focusing on the value drivers. A value driver is a trait or a characteristic of a business that would “reduce the risk associated with owning the business” or it could enhance the possibility that the business would grow in the future.
This blog serves as a brief summary of Stabler’s article.
Value driver #1 deals with cash flow. If your business has a stable and predictable cash flow, buyers will be more likely to pay a higher price for the business. Businesses that offer a recurring revenue stream are attractive to buyers because it allows for a predictable cash flow. Examples of recurring revenue are monthly contracts, memberships or subscriptions.
Value driver #2 is reliable financial information. Buyers want to know that the financial information provided by a seller is accurate and true. Sellers should be able to produce reliable financial information that supports what they tell buyers. Businesses that do not keep records or that cannot produce financial records often lose interested buyers.
Value driver #3 discusses customer diversity. A business that relies on one or a select few customers is less attractive than a business that has a broad customer base. Buyers may fear that losing one key client/customer may directly impact the cash flow.
Value driver #4 deals with the quality of the business’ workforce. Having a reliable, capable staff in place, with the success of that business not being reliant upon the owner him/herself, is valuable. A new owner will feel more secure knowing that upon ownership transition, the business will still be able to operate smoothly.
Value driver #5 is the growth potential of a business. Buyers want to know how they can grow a business after purchase. Are there avenues that the new owner can take to increase revenue and cash flow? Can additional products or services be added? The brighter the future of the business, the higher a price can be asked.
Value driver #6. Does your business have a system in place? Do you have documented procedures? Having operating systems and procedures in place can help a buyer feel secure that once ownership is transferred, the business can continue to run smoothly. Examples of business systems include inventory control, performance reports, personnel training and quality control.
Value driver #7 Equipment. Is your facility and equipment in good condition? Having a well-organized facility and equipment that is well-maintained allows for a higher asking price. Buyers do not want to pay for repairs if they feel or see poorly kept equipment. A well organized facility also gives the impression that the business is run in an orderly fashion as well.
Value driver #8 is Goodwill. Goodwill is defined as an intangible yet salable asset that comes from a business’ reputation and its customer relationships. Having brand recognition, strong relationships with customers and a strong reputation adds value to a business. It also reduces the perceived risk for a new owner.
Value driver #9 discusses barriers to competitive entry. Characteristics of a business that give it an leg up over its competitors are barriers to competitive entry. Whatever your business has that gives you an edge fall under these barriers. Some examples include proprietary designs, trademarks, licenses, and trade secrets.
And finally value driver #10 is product diversity. If your business offers a range of product, it diminishes the risk. Having fewer products to offer increases risk as losing a product of only a few drastically reduces revenue.