That's the question every entrepreneur asks as soon as they seriously consider selling. The honest answer: you don't know until you have it determined. But there are five factors that always determine the price. I explain those here.
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Most business owners thinking about selling their business have already made an estimate of what it's worth. Sometimes that number is too low, causing you to drop out beforehand or ask too little. More often it is too optimistic, causing you to go to market with an asking price that scares away serious buyers and bogs down the process before it has even begun.
A valuation that is well put together gives you not a surprise but a solid starting point. And in practice, that outcome is more often better than worse.
The basis of any valuation is normalized profit: what does your company structurally earn when you take out one-time items, private costs that run through the business and other distortions. That profit is multiplied by a factor that depends on the company's industry, growth and risk profile. The more stable and profitable your business is the higher that factor goes up and the more a buyer is willing to pay.
This is the factor that most surprises business owners and most directly affects the price a buyer is willing to pay. A business that runs entirely on you as the owner is worth less than one that runs well even without you, because a buyer is buying a business and not a job. If all customer relationships, knowledge and decisions are with you then that is a risk to a buyer that he translates into a lower bid price.
[Read more: Making business sale-ready, increase value for sale]
How many customers do you have, how long have they been customers, and are there contracts that tie up revenue for longer periods of time? A broad loyal customer base with long-term contracts is worth significantly more than a handful of large customers with no contractual commitment. Customer concentration where one customer determines more than 20 percent of sales is one of the most common risk factors that a buyer finds during the book review process that drives the price down.
A buyer buys not only what is currently there but also what is possible in the future. A company in a growing market with a clear strategy and proven scalability yields more than a company that has been operating at the same level for years, even if current results are similar. This is not to say that stability has no value but growth raises the price because it gives the buyer perspective.
Buyers want assurance, and they get that assurance from the quality of what you show them. A company with a strong team, clear processes, clean records and no hidden risks inspires confidence. A company where accounting is messy, employees leave or contracts are missing creates doubt, and that doubt leads to a lower bid or to the deal being called off during the due diligence process.
Wondering how your company scores on these five factors?
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We look at the financial results of the past three years, the current year and the budget for the coming years. On this basis, we determine the normalized profit and assess the development of the company over time.
In addition, we look at the factors that determine how a buyer values those gains:
Based on that analysis, we establish the valuation and determine the asking price together. Then we write the Information Memorandum (IM) that serious buyers get to see. On average, a full sales process takes 7 months and we work on a results basis.
[Read how the entire sales process works]
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A valuation is not just a number. It's also a mirror. We see exactly where there are opportunities to increase value before you go to market.
Most effective measures:
Those who handle this well will more than recoup that investment in the selling price.
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Yes. The valuation is completely non-binding and costs you nothing. You will then know what your business is worth and what, if anything, can be improved. No obligations.
After we receive the required information, we will deliver the valuation within a few business days. We then discuss it together in a meeting.
Yes, often they do. Profit is one factor, but not the only one. A strong customer base, a good team or a good market position can significantly increase value. Have it determined before you draw a conclusion.
Then you'll know. And then together we can see what it takes to increase the value before you go to market. That's better than being surprised during negotiations.
The valuation is the starting point. The final price also depends on the market, the buyer and the negotiations. A good advisor will get more out of those negotiations than you expect.
Knowing what your business is worth is the first step. Not to sell right away, but to make an informed decision. That step is free and without obligation.
