What is Your Business Really Worth?
Recent small business research has suggested that over 20% of all SME’s will be put up for sale in the next five years – and at least a third of these will be used to fund the owners’ retirement. Also at least a third of the businesses put for sale will be done so without ANY clear exit strategy – this is like playing “Lotto” with your retirement fund.
So how do you extract the value you deserve from your business and what do you think your business is really worth?
The first answer to all of these questions is: “take your time and allow at least 12 months to get your business ready for sale”. The second answer is: “make it absolutely crystal clear to your buyer where the value in your business is”.
What Determines The Sale Price:
A business is ultimately worth what the market will pay – and it is your job to make that value absolutely crystal clear to the buyer.
The sale price is typically based on some multiple of past earnings or net profits before tax, often adding stock at valuation and some amount for goodwill. So the better your past earnings are, the higher the sale price. A business can still get a good price with poor profit performance if the buyer can see strong sales growth. Key aspects that increase the multiple are:
For most small businesses this multiple is typically 3 – 5, although larger multiples can be achieved, based on demonstrated upside to the business.
- Steady (or growing) and loyal client base.
- Future growth opportunities within the industry.
- Well defined roles within the business and a low reliance on the business owner
- Low perceived risk of the business
This method of valuation makes an assumption that past performance is a reliable indicator or future performance. In a mature industry or with a stable business this may be the case. However in some cases the business will have better prospects in the future. In this case a better valuation method is to predict the future earnings of the business and “convert” these future cash flows to a “net present value”.
Regardless of the method of valuation, the key to getting a good sale price for your business is to make it completely clear to the buyer where they will get the return they require.
How Do You Get The Price You Want?
The best time to sell your business is when you can demonstrate the certainty of future cash flows, clarity within your business plans and a lack of reliance on key staff or yourself. You typically need at least 6 months to prepare your business for sale, and often the best result comes from planning 1-2 years ahead.
Key steps involved in getting the price you want for your business includes:
The last point to make is that often the best buyer for your business is one that has worked with you for some time and understands the business and the risks involved. These businesses will often provide the best sale price, as they understand where the value is and may offer significant synergies with their own business.
- Develop a clear succession plan showing what skills are critical to the business and how these are being transferred across staff in the business.
- Increase cash flows in the business to boost earnings and target core markets to increase sales
- Clean up the balance sheet to show how assets and debts are being managed effectively
- Demonstrate clearly where the profit in the business is generated and ensure this is clear in P & L statements
- Explore strategic linkages with other businesses in your supply chain
- Develop clear action plans that show where the improvement opportunities are and what actions must be implemented to take advantage of the opportunities
Getting the most from your business takes time and requires a strategic look at the business, understanding how the business makes profit and making that clear to potential buyers. It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.
Getting a quick sale usually means giving up value that could be in your bank account. You are much better to take your time to get the value you deserve than throw away value you have built up over years of hard work. The key message in this is to BE PREPARED!
The first step is to understand what the value of your business is now and where the profits are generated. Knowing this allows you to develop plans to increase the value and to structure the business to make the value crystal clear.
It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.
Executed properly, this can take up to two years before you are really ready to sell. But the increase in value can be many times over if done correctly. And that could mean having enough funds to buy into your next business or retire in comfort, rather than scratching around for your next job.
Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.
We offer a free assessment of your situation and review what potential value exists within your business.