Selling A Business
Master These 5 Value Drivers To Sell Your Business At The Highest Price
Determining the fair value of a business for sale isn’t easy. As the owner who has built up the business over the years, you will have a high degree of comfort with your company. This knowledge will help you to arrive at the asking price that you expect; however, price is based on the buyer’s risk that earnings will continue. If you are unable to reduce this risk, the buyer likely will not pay your price.
How can you help convince the buyer to pay up? Here are five ways to highlight your company’s strengths and reduce risk. By paying attention to these value drivers, you’ll help to differentiate your business from other’s on the market and drive value.
1. A dependable cash flow
This is probably the most critical parameter. Buyers want to be assured that the firm’s operations will continue to produce a stream of net cash inflows.
You should highlight agreements and relationships that yield recurring or repeating cash inflows. Maintenance contracts, annual subscriptions, loyal customers, and agreements that require customers to pay on a regular basis are examples of this value driver. Remember to explain to the buyer that these relationships should continue to remain in existence after the sale is completed.
2. Accurate financial statements
You can be sure that the buyer or the buyer’s accountant will inspect your financial statements with a fine-toothed comb. You must be in a position to explain every figure that it contains. You should also have the data or proof to back up your numbers.
If there is an error in the financial statements, the buyer will become suspicious. Even a small mistake could lead to creating the wrong impression. It is advisable to review your financial statements for the last three years carefully and put your self in the buyer’s shoes – what stands out to you on your Profit and Loss and Balance Sheets?
Poorly-maintained financial records that don’t accurately reflect your company’s position are a big no-no if you are trying to get a premium in the sales process.
3. A sustainable competitive advantage
So your business is profitable and producing positive cash flows on a consistent basis. But this may not be enough. The buyer will want to find out whether the current level of performance would continue into the future.
How will you prove this? One way to convince the buyer is to point out the competitive advantages that your business has. Which are the factors that will prevent competition from taking away your company’s market share?
If your firm possesses any copyrights, patents, vendor relationships, below-market lease agreements, work processes and special skills that gives your business a sustainable advantage over the competition, be sure to highlight them in your presentation to the buyer.
4. Organizational strengths
Is your office/factory/place of work in immaculate condition or is it poorly maintained? Are your current processes and procedures documented in a manner that is easy to understand? The price that you will get for your company is going to be influenced by these factors.
One area that you should focus on is your systems and procedures. Hopefully, processes are written down. Ideally, your company’s operations manual should be a living document, not a compilation of old processes that nobody even looks at.
A well-maintained procedures manual that is up-to-date and which correctly reflects the company’s practices will give the buyer great confidence in your company. We have definitely seen buyers pay a premium for organization – both operationally and financially. In a worst-case scenario, a shoddy workplace and undocumented practices could prove to a reason for the buyer to back out.
5. Opportunity for expansion
A buyer will pay for the historical performance but they decide to buy based on whether or not they believe they can grow the business. A company with already growing revenues and profits will command a higher valuation. But how will you convince the buyer that your business is on a growth trajectory?
Even if the business’s sales are flat or declining, you should brainstorm ways to grow the business. A new owner, with renewed enthusiasm and energy, is likely to push harder on sales than a comfortable business seller. Painting a picture on specific ways a new owner can grow the business after the sale.
The bottom line
Focusing on these value drivers will help to enhance your sale price. The time to lay the groundwork and consider these factors is now. This will give you the time that you need to organize your records and to present your company in it’s most positive light.
Sunbelt Business Brokers of West Palm Beach can help you prepare to sell your business in South Florida, guiding you from listing to closing. If you’re considering selling your business, get in touch with us today for a confidential, no obligation conversation.
Ryan Cave is President of Sunbelt Business Brokers of South Florida, a business brokerage firm specializing in the purchase and sale of small to midsize businesses. Sunbelt Business Brokers of South Florida has been involved in the valuation and sale of hundreds of privately held businesses for nearly 20 years.
