Each year, thousands of small businesses are sold. However, many owners have little understanding of how their businesses will be valued when they attempt to sell. Business valuation experts assess a number of factors when providing an opinion of the fair market value of a company, looking for certain strengths and weaknesses.
Before attempting to sell, there are several steps an owner can take to maximize the value of his or her company. Here is what you can do to ensure your business generates the highest possible value.
Reduce Your Risk
Risk is perhaps the biggest red flag for a business valuer assessing a company. There are a number of different ways risk can perpetuate itself. One common form is when the success of the business is overly dependent upon the owner or executive team. When evaluating such a company, a business valuer will ask what would happen to the company if the owner or executive team suddenly left. Small business owners can mitigate such risk by creating a comprehensive succession plan, including the development of a replacement management structure.
Additional common risk factors include overdependence on a limited number of customers or suppliers. As in the above example, a few entities hold disproportionate influence, making the business highly vulnerable to financial decline if it loses a major customer or supplier. For this reason, it is important for an owner to diversify his or her revenue sources and suppliers.
Mind Your Balance Sheet
A clean and well organized balanced sheet is a small business owner's best friend. For one, financial statements that appear neat and professional make it easier to value a company and inspire the confidence of a potential buyer. If you are serious about selling your business, you should consider having your annual statements prepared by an external Certified Public Accountant (CPA) as opposed to relying on internal statements prepared using QuickBooks or another software program.
In addition, it is critical that you eliminate any unnecessary or extraneous expenses that reduce the profits from your company, and thereby reduce its value. For instance, putting personal possessions on the balance sheet, such as a vehicle that is not essential to the operation of the business, will raise the overall asking price of the company, and decrease its desirability to purchasers who only wish to acquire the business operations. A business owner would be wise to remove these "non-operating assets" well in advance of a sale.
Create a Strong Business Model
There is no "one size fits all" model for a successful, profitable business. However, when evaluating a company, a business valuer will analyze the business model carefully and determine whether it is one that ultimately makes sense for that particular business. For instance, most business valuers will look favorably upon a company that has strong organic growth, meaning that it is growing by gaining new customers or revenue streams. By contrast, a business that is growing inorganically through acquiring similar companies may be given a lower value; however, if such a company has a strong business model demonstrating how it plans to increase revenue through achieving synergies and economies of scale, a business valuation expert may take these factors into account and their upward effect on the company's value.
Furthermore, business valuers examine whether a company is in a positon to successfully execute on its model. For instance, they will ask if it has the proper resources and staff to achieve the goals and benchmarks that it has laid out.
Identify Potential Buyers
If a business owner is serious about selling, it may be in his or her best interest to identify potential buyers who would be willing to pay a premium price. For instance, targeting key competitors who stand to gain significant market share from acquiring a company may allow an owner to receive an above-market purchase offer. A prominent example of this is Facebook's purchase of WhatsApp for a whopping $19 billion. While many experts argued that Facebook overpaid, the company was willing to do so since acquiring WhatsApp provided it with a stranglehold over the social media market.
Most small business owners dream of one day selling their companies and cashing in. However, they often aren't aware of what specific criteria will be used to value the business. By following the above recommendations, they will be able to maximize the value of their business and ensure they are in a position to sell for the highest amount possible.