Building Up Your Business Valuation When Selling a Business
Typically, when we meet with business owners preparing to sell their company they have financial goals in mind that they would like to meet through the sale and are wondering how to determine the value of a business. Quite a few of our clients plan to retire after they sell their business and want to contribute to their retirement fund. Other business owners are looking to reinvest their profits into a new business venture.
A small business is definitely not a small investment, so receiving a valuable return is a great goal to have no matter the financial plan for the funds afterward. In this article, we will take a look at some of the key value drivers in a business valuation to help entrepreneurs maximize the profit they can receive from a sale.
What Drives Business Value?
Generally speaking, the market and buyers drive business value, because what makes a business valuable to buyers is what affects the price buyers are open to paying for a company. But in addition to market factors there are specific areas of a business a business owner can affect to create more value and grow their valuation. Learn more about how to increase your company’s valuation through the following tips.
Owner Absentee or Semi-Absentee
If you have an avenue of making money without actively working, that would be considered a great way to build wealth. There are many types of business ownership, but any business that requires limited oversight and management, whether through middle management or the business model itself will have a higher valuation than a similar business that requires the owner to be involved in the day to day.
Processes, Procedures & Standards
Employees are valuable; they make the businesses of the world run and they accrue a great deal of knowledge. But what happens when an employee decides to change jobs? This is where well documented processes, procedures and standards come into play. When everything about your business is documented it becomes much easier to replicate the same outcome each time. And this means an employee or even a manager exiting your company will have a limited impact on operations. Similarly when a new owner comes into play they will know that the tools they need to learn and run the business have been documented.
Multiple Revenue Streams
The old adage of not putting all of one’s eggs in one basket is important to remember here. Businesses and the economy are not static, so a source of revenue that once produced well may fluctuate. Being able to rely on multiple, diverse revenue streams is a great way to build additional value into a company and means that you’re not relying solely on one source of income.
History & Reputation
When starting up a business, getting through the first five years is one of the hardest parts. After the initial startup phase a business becomes more stable, and this is part of why buying a business with a history is a valuable opportunity. And while you can’t affect the length of time your company has been in business; you can have an impact on its reputation. The reputation of a company can be built through a great online presence, business directories, review platforms, and memberships/organizations that add value to your website through backlinks. Implementing processes for managing the online presence of your company and seeking quick feedback from customers is a great way to give more gravitas to your brand name.
What are Potential Buyers Looking for in a Business?
Buyers are looking for great value-added items in a business like ownership involvement, middle management, processes, recurring revenue, multiple revenue streams, history and the reputation of a company. Other criteria a buyer may be looking for in a business acquisition is trained staff in place, a valuable location for traffic, signage, a long-term lease, or the possibility for growth.
What Causes a Decrease in Business Value?
In the business brokerage industry, we like to say there is a buyer for every business, it is simply a matter of strategic marketing and pricing the business right for the current market. Opportunities to get ahead of your business valuation are making sure to properly track your books and records and implement value building strategies like those explained above that are based on what buyers look for in a small business.
Why Should You Look to Hire a Business Broker?
A business broker will help you price your business for sale on the current market in balance with your financial goals and may already have a great buyer for your business in their queue of clients. They can also help you maximize your return through creative deal structuring and financing.
To speak with a business broker on how to maximize your profit in a business sale, schedule a free consultation, or visit our website.
Rachael Holstein has been the Marketing Manager for Transworld - Rocky Mountain since 2016. Her work experience has been largely focused on business development and marketing in business brokerage, finance, architecture, property management, and information technology. A long time resident of Cleveland, Ohio, she attained her undergrad from John Carroll University and her Master’s Degree from Cleveland State University. In 2013, she relocated to Denver with her husband, Joe, and her furry companions to explore the mile high lifestyle!