If you’re looking to sell all or a portion of your business, determining an accurate market value is key for selling a company. You may have checked an online business value calculator which pulls in simple data such as earnings, member compensation, growth, risk, and discount rate and churned out a number that feels right, yet it misses the mark with regard to market position, operational and process efficiency, assets and liabilities, and future opportunity. A simple calculation like this could either dramatically inflate or deflate the value of a business. Let’s dig into a few areas of consideration calculators often miss, which a business valuation expert will capture.
Proper Documentation Contributes To Business Value
When you think of documentation for a small business valuation, does your mind immediately go to P&L statement? While high-level financials are critical, understanding the ins-and-outs of a business’ operation is key. Standard operating procedures (SOPs) clearly documenting processes, critical steps, KPIs, and who the key players/roles are in the business. If you haven’t already created them, develop SOPs for every department in your business. In addition to SOPs, produce a marketing plan including KPIs and projected sales. Providing these documents articulates to the broker how the business operates and sets expectations for the earning potential for the business.
Record Clear and Complete Financial Information
Business owners often manage their business finances in a manner to reduce taxable income, however this can artificially deflate the value of the business, as it does not accurately demonstrate the earning potential of the business. In light of this, you may need to adjust the historical financial records to more accurately represent the business’ earning, profitability, and asset utilization.
Who Are The Customers?
Supply a customer list and customer metrics such as retention rate, acquisition cost, customer lifetime value (LTV), and any exclusive contracts you have with customers/dealers/vendors. If customer retention is low and acquisition cost is high, consider it your mission to improve customer retention in the months (or years) as you prepare for sale. Don’t consider retention the next owner’s nightmare, tackle it now and develop an SOP for post-sale customer engagement. Also, does any one or handful of clients represent more than 20 percent of the business? If so, work to reduce and minimize the percentage of your top clients so the business will survive with or without these clients. Business buyers and banks get very nervous when there is a client concentration and it brings value down, in some cases there is a considerable discount.
Partner With The Right Business Broker
Selling a company can be a complex process; having a seasoned business broker guide you through the process can both expedite and maximize the deal. Owners must remember, though, even the best M & A firm cannot waive a wand or shoot a sale price off the cuff. A business owner must remain engaged in running the business and providing as much detail as possible to the broker for the most accurate business valuation and deal possible. Make certain the business broker you choose has at least 10 years of experience or more, he or she is part of a larger firm with resources to support the evaluation, marketing and diligence of your transaction. It’s almost impossible for one person to manage all aspects of a sale transaction so it’s vitally important the business broker you choose has lots of support resources. If not, find another business brokerage firm that can deliver this type of comprehensive service it will help you maximize the value of your business.