Kеу Fасtоrѕ thаt Affесt the Business Vаluаtiоn
The financial history and current circumstance of the business is the first thing a potential buyer will look at.
It’s vital to have complete and up to date records of revenue, cash flow, expenses, and profits. Buyers will be keen to understand how expenses have been controlled and whether capital expenditure will be required in the future.
Many investors will buy companies for 2.5 to 3 times annual profit, so cutting down unnecessary expenses early can help boost your business valuation.
Conversely, other investors will look for companies that are actually making a profit whilst having high expenses so that they can cut down outgoings and make the business more profitable.
Having at least three years of financial records will help you sell a business for a fair price.
Customers and clients
If you have a strong customer base then you will certainly be in a better position to sell your business, even if you have high expenses, as potential buyers will see opportunity to grow the business and increase profits.
Similarly, if you are well known in the local area, or even nationally, it will be far easier to selling a business.
Consider investing in your marketing in the months leading up to putting the business on the market. Having high traffic to your website will also put you in a strong position to increase the asking price of your business.
Another key factor in determining the value of your business is the net value of your assets such as:
- Accounts receivable
An asset-based valuation considers the total current value of a company’s assets less its liabilities.
To assess your business’ asset value, create an inventory of all current assets including intangibles such as intellectual property.
Remember that the value of certain assets such as vehicles, equipment, and technology depreciates over time.
This is something you’ll want to consult an accountant, as depreciation can cause your assets to be worth less than you expect, and will therefore affect the value of your business.
Liabilities are the opposite of assets. They will affect the value of your business and should be included in your inventory. These can include:
- Bank overdrafts
- Outstanding expenses
- Accounts payable
Be sure to have an accurate record of your assets and liabilities before you try to sell a business, as potential buyers will want full details before signing any deals.
There are some factors beyond your control that will determine how much you can sell a business for.
The level of demand in your market and the value of similar businesses, along with market saturation, will affect the number of potential buyers for your business.
Economic factors such as financing cost levels and inflation rate will also indicate how easy it will be to sell your business.
If there are many similar businesses to yours on the market, you might find it difficult to get the price you want as buyers have many options from other sellers. This is where proper marketing, a good website, and potential for growth can differentiate you.
Intangibles, for еxаmрlе, the роtеntiаl grоwth of your business, thе ѕtrеngth оf your customer rеlаtiоnѕhiрѕ аnd intеllесtuаl рrореrtу аnd gооdwill саn likewise influеnсе thе finаl vаluаtiоn.
Having a good brand will certainly help add value to your intangible assets, as will trade secrets and potentially recipes, research, intellectual property, and your website.
Intangible assets can increase your chances of selling a business fast and at a good price, but are difficult to put an actual figure on.
When valuing your intangible assets ahead of business sale, consider the following:
- Domain names and websites
- Customer lists and email subscribers
- Intellectual property
- Trade marks
If your business is dependant on your involvement, potential buyers will want to understand the impact of your exit and whether the value of the business will diminished by it.
Consider who are the key people in the company, and whether they will stay on as staff when the sale is finalised. The earlier you start planning for this, the better prepared you will be, and one of the most important aspects of selling any business is being properly prepared.
Investors will want to know which key staff they should keep, and who they will potentially want to let go.