30 September 2024: Selling a Business
Its Value and What Drives It
When selling a business, knowing its value is arguably the most important factor in determining whether the selling efforts will be successful. (That, of course, as pricing it correctly.) Understanding how to increase that value is key to maximizing the price you’ll receive when it is time to sell.
“Increasing value” assumes two things: 1) Time; i.e., planing for the eventual sale. Increasing your business’ value generally requires more than a 30-day “clean-up”. 2) Knowing what drives the business’ value.
WHAT WE’RE LOOKING FOR: Business and IT Services; Building Trades: EBITDA $2M-$8M. Location: Continental U.S.
in**@Wo**********************.com
But what value drivers should be considered, and why? To increase a business’ value, owners must understand how hypothetical buyers would perceive their business operations – and how such buyers will likely arrive at their own value.
We’ve pontificated before on considerations that can drive a business’ value but let’s look closely at some of the specific, identifiable areas that, if focused on by the seller in advance of the selling process, can make a big, positive impact on what that seller will realize at closing.
Business Owners
Profits and cash flow: Most buyers – especially financial buyers – prefer companies with high profitability, positive operating cash flows and consistent growth patterns, especially relative to the industry and competitors.
Longstanding and diverse customers or clients: Most buyers are wary of customer concentration, a situation in which one or two customers are responsible for an outsize percentage of the business’ revenue. Companies that are not tied to one or two key customers and/or that have customers across multiple industries are more insulated against economic downturns, and thus, more attractive to buyers.
Experienced and capable management team: Strong, decentralized management teams are valuable. If a company is reliant on key people who have no contractual obligations to the company, buyers, fearful that such managers will leave, may require an earn-out or ongoing consulting agreements with the sellers as a condition of the sale. Having employment agreements and incentives in place to keep management on board to help run the company post-sale is an important metric that adds value.
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Proprietary products and services: Companies with proprietary products or services appeal to potential buyers because it means the company is poised for future growth. This may include patented or trademarked products or services, or a unique know-how or barriers to entry. Such barriers could also include unique or highly specialized certifications and licenses or other “rights” that diminish competitive pressure.
These assets also bring distinct competitive advantages, further driving business value. To ensure business value is being increased over time, it’s important to maintain these unique offerings by proactively reinvesting and maintaining them.
Technology and systems: Maintaining the latest technology in the business will not only help with post-sale integration but will also provide a buyer with security knowing a secure IT infrastructure is in place. This also positions a seller to provide reliable information for due diligence and helps them run the business smoothly prior to the transaction.
Asset management: Potential buyers look for efficient collections and inventory management, which can lower working capital required to be left in the business and allow a seller to keep more cash in a transaction. Company equipment or assets not currently in use should also be written off or sold prior to entering a transaction. Obsolete inventory and uncollectable receivables, though often ignored in the balance sheet cleansing, should also be written off.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
Closing The Gap
Often a significant gap exists between what an owner thinks his or her business interest is worth and what it realistically will sell for – which brings us back to the proverbial “most important factor”; knowing what your business is worth.
We do valuations all the time and not solely for business owners that are considering selling. Over the years, we’ve found that having a professional business valuation or appraisal done, reduces the chances of a dispute over the business’ value to near zero. Yes, we’ve had buyers say they “…wouldn’t pay that much for the business” and we’ve had sellers say they “…need (want) more…” for their business. But none has ever argued that the valuation report was flawed.
That said, there have been occasions when a buyer, putting greater emphasis on one metric and less on another than we did, arrived at a defensible value that was different than what we arrived at. If the difference is minimal, we usually can negotiate a solution acceptable to both parties.
However, in some cases the difference can be substantial. In such instances, an earn-out is often the best solution.
The Bottom Line
If you’re thinking of selling your business, take the first and most important step: find out what it’s worth – what value the market is likely going to place on it. A proper valuation will give you an “estimate of value” – or range of values – that you can use to determine if the likely net proceeds, after sales costs and taxes, will be sufficient to live the post-sale life you’re planning.
But equally important, it will tell you if the value needs to be increased prior to selling. Such increase can be accomplished by focusing on the points discussed above. If we can help, let us know in the comments box, below.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com