What Impacts a Business’ Value?
When selling a business, what impacts its value? Well, the amount of money the business throws off into the owners’ pockets is probably the first answer that comes to mind for most people but there are other aspects of a business that impact its value. Let’s examine a few.Business Longevity
How long has the business been around? Has it shown “staying power”? Has it survived – thrived – during the tough times as well as the smooth years?
Business longevity is important to most buyers and they are likely to pay more for a business that has a 10 or 15 year history and shown resiliency in the face of challenges than for the same business showing the same profit that is only two years old and hasn’t had to deal with any turmoil yet.
Intellectual Property
Does the business – or do the owners – have a trademark that will be sold with the business? What about a website and social media properties?
The first thing customers, clients and buyers – and business brokers! – do when interacting with a business is an internet search to see what kind of information they can glean. While most businesses these days have claimed their online “real estate”, they are not all using that real estate to their best advantage.
Is the online aspect of your business working for you? Have you assigned someone to monitor your online presence? Is your website optimized for search engines?
This is particularly important if the business is an eCommerce company or otherwise does most of its business online.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
Recurring Income
A business with recurring income is more highly valued by buyers than one that has to make every sale every day.
Recurring income generally refers to businesses that get paid every month for a service that the buyer must have and has contracted for. Some examples familiar to most people would be those that provide software as a service, or SaaS, such as Microsoft for its Office 365 and Google for its email storage.
Lesser known private companies would include Market Circle for its Daylite CRM software and SoftPro for its real estate closing and title software. In these instances, users pay a monthly fee but the users cannot operate without that particular service.
Another example of recurring income is network security, help-desk services, web-hosting and other similar businesses related to the tech world. In many of these cases, the business makes the sale once and gets paid every month for the next two or more years. As the world continues to move online, more and more businesses will be offering services for which they charge a monthly fee.
Many non-tech businesses have been trying to figure out how to convert their business model to one with recurring revenue.
Client or Channel Diversification
No matter how big the business is – and no matter how much money falls to the bottom line – if a large percentage of its revenue comes from one or two customers or clients, its value will be negatively impacted.
As astute buyer will calculate the economic impact of losing one – or both – of those customers, try to gauge the risk of that happening and arrive at a value that reflects that risk.
The more diverse a business’ client or customer base is, the lower the risk to the business if one or two leave – and the higher the value because of that lower risk.
Willingness of the Seller to Finance
A business that can be bought with seller financing is a business that can be bought by more people. More potential buyers competing for a business generally means a higher value.
More than 80% of small and mid-size businesses include some aspect of seller financing. A seller that is willing to offer financing – rather than one that grudgingly agrees to do so when asked – will, all other things being equal, receive a flood of inquiries.
Geography
Is the business located in a desirable area? Do people want to move there?
This issue has two aspects. First, will buyers want to live there? A couple of our offices are in rural areas. We’ve had several deals fall apart – even as they were in due diligence – when the wives showed up and asked the ultimate question” “Where’s the mall?”
Second, a desirable area will mean a steady inflow of clients/customers as more people move in.
Type of Business
Some businesses are more “socially acceptable” than others and, just as they do when buying a car, many buyers will visualize themselves owning a particular business and consider what that business says about them.
For example, two businesses in the same town or city throwing off the same amount of discretionary earnings. One is a healthcare provider, the other is a pawn shop. The chances are that more buyers will be able to imagine themselves as owner of the former than of the latter.
These aren’t the only issues that impact value. There are many others some of which we discuss here and here. But it’s important to remember that the amount of money a business throws off to the owner is not the only standard by which to establish value.
________________________________________________________________________
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
The Bottom Line
Valuing a business correctly is the key to selling it. A large majority of businesses brought to market do not sell – generally because they are priced to high. If you want your business to sell, you must have it priced to account for all the aspects that affect value. If you have any questions, comments or feedback on this topic – or any topic related to business – I want 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 profitable week! Joe
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions