Putting value on 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 straightforward 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 a small business than build a new business. An existing business would have a proven business model that has worked for several years. Many lose money for several years before finding their feet. A good flow of cash is required to operate a business if you have heard the expression “cash flow is king”. I come across many good ones where cash is an issue. Buyers are generally looking for cash flow to pay a good price.
Supply and Demand
Almost all marketplaces work on supply and demand. Note I said almost all, marketplaces have transparency issues and it is debatable if they should be called a marketplace. The market should be run on supply and demand, more supply and the market falls, and more demand 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 many traders do well in boom times but go in lean times. The better traders had seen market ups and downs, and so too have companies. Businesses that have been around for a long time seem to be the ones that reinvent themselves. Let us help you, sell your business.
Return on Investment ROI
People who buy companies are looking for a return on investment. Generally, the shorter the return on investment the better the gain. It’s cheaper for potential buyers to buy businesses with intellectual property, business licences, licences and permits than starting a business.
A buyer is looking for transparency, the more transparent you can be the more sure a buyer is about the business. I try and get as much information up front, not to give to a buyer but to have it ready to give to them. Why give information a buyer is not interested in 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 companies of the time. Unless they reinvent themselves, they could be into rough times. Examples are video rental stores, you can’t even find the bones now.
An important factor is risk versus reward, I have good businesses that have a payback time of a year or less. The reason the price is low could be some or all of the above.
Prepare your business for sale
Before you put your business for sale as a business owner you need to think about a succession plan. How does a new owner get into the business when you are not there? Make sure your business premises have the right business licence, licencing and permits.
As you can gather it’s a bit of 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.
When selling a business 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. Some things look simple and after you have done it ten thousand times you probably are. Like bricklaying, I leave it to an expert. If you would like me to value your business, please contact me, for professional advice.
If you are looking at buying or selling a business talk to me first, we are the business marketing experts. You can contact me here or on social media, LinkedIn.
Here are Some of the Future Posts Yet to be Written
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