How to value a business get the right price when selling a business
How to value a business is easy it is as much as someone will pay for the business. Working out how much someone will pay for it is not as straight forward because there are many factors to consider.
Here are some of the business valuation factors
One reason people buy businesses is it may be cheaper to buy the business than build a new business. An existing business would have a proven business model that has worked for a number of years. Many businesses loose money for a number of years before finding their feet. Good cash flow is required to operate a business, if you have heard the expression “cash flow is king”. I come across many good businesses where cash flow is an issue. Buyers are generally looking for cash flow to pay a good price.
Supply and Demand
All most all market places work on supply and demand. Note I said almost all, some market places have issues with transparency and it is debatable if they should be called a market place. The market should be run on supply and demand, more supply and the market falls, more demand and it rises. But that is not always so. In short if there are lots of your business sector on the market it is a falling market. When doing a business valuation similar businesses need to be looked at to work out what your business is worth.
Age of the Business
A business that has a proven track record for a large number of years often means it is a good business. If the business has gone well in recession and boom times you would think it is a good business. In my time in investment banking I have seen so many traders do well in boom times but go in lean times. The better traders where ones that had seen market ups and downs, so to are businesses. Businesses that have been around for a long time seem to be the ones that reinvent themselves.
Return on Investment
People that buy businesses are looking for a return on investment. Generally, the shorter the return on investment the better the price.
A buyer is looking for transparency, the more transparent you can be the more sure a buyer is on the business. I try and get as much information up front, not to give to a buyer but have it ready to give it to them. Why give information a buyer is not interested in to the buyer, more information can confuse buyers. When you have a buyer time is of the essence, because they will still be looking around and could find something better while you are collecting the information.
A Business of the Times
Although some businesses could be doing well right now, they may not be businesses of the times. Unless they reinvent themselves, they could be into rough times. Examples are videos rental stores, you can’t even find the bones now.
An important factor is risk verse reward, I have good businesses that have a payback time of a year and less. The reason the price is low could be some or all of above.
As you can gather it’ a bit of a black art to price a business
Things to remember, it’s always easier to drop the price than raise it. Don’t price it too high or buyers will think they would be wasting their time even looking at it. Price it a little expensive because everyone likes a discount, build it in. There are many valuation methods, the trick is to pick the right valuation method. Which is easier said than done.
Sometimes it’s better to use an expert
The way I look at things is if I can add value, I should do it, if not get someone else to do it. There are things that look simple and after you have done it ten thousand times it probably are. Like brick laying, I leave it to an expert. If you would like me to value your business, please contact me.
Here are Some of the Future Posts Yet to be Written
That First Meeting
Putting Your Business up for Sale
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