When business owners think about the value of their business, they rarely do it objectively. Most business owners do not know how to value their business from the perspective of a buyer.
If they do know valuation methods, they often apply entirely subjective criteria so that the result gives them the number they are looking for. Thinking like a buyer means detaching all emotion from the way you think about your business – and usually that means getting someone else to look at the value. Even then it’s hard not to “shoot the messenger” when the results come through and it’s not the news you are looking for.
Getting an objective valuation for your business from someone who looks at all the risk factors in your business is something any business owner should do as early as possible. And keep doing it on a regular basis to see how you are improving.
The value of your business is about more than just the numbers.
The four most important risk factors a buyer looks at in the first instance are:
- Over reliance on the business owner
- Concentration of revenue on a small number of customers
- Lack of financial reporting (or poor-quality financial information);
- The rhythm of revenue generation (recurring revenue)
Looking at these issues objectively, they make sense not just to a buyer but to a business owner. If the business can’t run without you, then you can never take a relaxing holiday or prolonged absence. What happens if you become ill or incapacitated? Or worse? If the entire customer base relies on the relationship the clients have with the business owner this poses a significant risk to the immediate and long-term revenue of the business. This is what a buyer is acquiring and investing in.
Without historic financial reporting the buyer finds it hard to see the real operational performance of the business. The robustness of the business financial reports give comfort to the buyers who are investing in a return on their investment. It’s easier to sell if you help the buyer see the value and not make him work for it. The harder a buyer must work to get to understand the numbers, the more nervous they get and the more risk they see.
One way of looking at your business is asking the question “Would I buy this for the amount of money I’m asking?” and secondly “Where would I get a return on the investment I’m making?” This is the first step into the buyer’s shoes.
The more risk the buyer sees in the business, the lower value they place on the investment – or they walk away before wasting more money on the due diligence process. Due diligence costs both parties in time, energy, and money. For the unprepared seller it also adds greater levels of anxiety and stress, especially if there is time pressure to sell because of circumstances.
The great advantage of addressing these 4 factors, whether you are planning to sell now or in the future, is that you are adding value to your business as you work through them. By removing the reliance of the business from being entirely on your shoulders, you’ll also find you have more time and better performance from your team. Win-Win!
Are you ready to sell? Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Helping business owners get their businesses exit ready so they can enjoy a happier, richer future. Christine saves them THOUSANDS and increases the value of their businesses by MILLIONS.