The Complete Guide to Selling Your Business: Determining a Valuation Range for Your Company

Selling a business is a long and complex process. You may be ready to sell this year or just curious into what it will take to sell – this series will help. The business sale process can be broken down into core stages – from who you need to hire, to what questions you should be prepared to answer, to how to hand off your company once you’ve signed on the dotted line.

Step 6: Determining a Valuation Range for the Company

Open up any finance textbook and you’ll find thousands of pages devoted to valuation theory, valuation principles and techniques for arriving at a rational and dispassionate value for your company.

But no matter how sound the valuation theories are, companies are valued in the real world, by real people with varied motives, amidst a dynamic market and uncertain future that no one can perfectly predict. So entrepreneurs must focus on driving their company’s valuation by building the best business they can build, engaging with real-world investors and potential buyers, and painting a picture of their company’s future that is both expansive and credible.

Supply and demand factors are key to how high valuations are going to be. “What is comes down to, more than anything, is supply and demand of capital in the market versus those companies that are available to invest in,” said Adam Price of The Forbes M&A Group.

So by the time you’ve decided to actively sell your business or raise a round of financing , you’ve got to put the building the business on hold and devote your attention fully to the capital raising process. At this point in time, the two most important drivers of your company’s valuation will be:

• It’s future
• Competition among investors

The Future

Investors only care about the future of your company. When they study your historical track record, past financials or customer reviews, they are doing it to look for clues about the future prospects of your company. The quality and credibility of the picture you pain t of your company’s future – the size of the market opportunity, the speed and predictability that you can serve your customer base, and the defensibility of your product offering – is the most important driver of your company’s value.

The more predictable and sustainable your company’s future profits are, the more valuable it becomes to investors, who constantly assess the risks and rewards of investment opportunities.

Don’t be the entrepreneur who is mired in the details fo valuation or puts their head in the sand and simply pick a number based on their personal needs or what they heard is the going rate in the industry. That is just putting your head in the sand.

Competition among Investors

A credible and compelling future makes it easier to attract investors. You will not realize a fair value (let alone maximize your offer) for your business without multiple uniquely interested and credible parties at the table. Even if your business has been growing at 100% top-line with 50% EBIT margins for 10 years straight – if you only have one interested party at the table, you have created no competition for your business and will struggle to achieve a fair outcome. Think about your business: the richer your pipeline of customer prospects is, the more choosy you can be about which prospects you focus on closing, and the more disciplined you can be in negotiating the pricing and terms or your customer contact. That is the same exact concept that occurs when raising capital or selling your business.

Creating competition in financing or exit process is one of the most important reason for having a good advisor – they will help business owners drive to a fair outcome by attracting multiple, interested parties that are acutely and uniquely motivated to buy or finance your business.

As you prepare to raise money or sell your company, focus on two things: how to credibly articulate the future of your business in the most predictable and expansive way possible, and devote meaningful time to doing the necessary networking and relationship development in advance so you can attract a set of uniquely and acutely interested partners to the table.

Portions of this blog were taken from Axial Forum