How to sell your own business
When people decide to sell their business, they generally want to achieve that exit for the maximum value. However, there are steps to take to develop an optimum business valuation.
If you are personally thinking of selling your own business in the near future this blog is intended to help you understand some of the key points.
How much is my business currently worth?
Firstly, it is essential to establish how much your business is currently worth and compare it to the value you hope to achieve. Often there is a marked gap in these two numbers, and that can initially be a bit of a shock for business owners who hope that their company will be their retirement fund.
As there are many aspects which play a part in its overall value, and different appraisers have different methods, getting the valuation you want is not straightforward, and often can take sustained effort over a number of years before marketing the business for sale.
Ultimately, regardless of a technical valuation, what is received on the sale of a company comes down to what a buyer is willing to pay.
With that in mind, it’s worth considering how they will place value on the business, as well as any strategic or personal objectives that go beyond the technical valuation.
Here are some points to consider:
Business Earnings:
Your business valuation is often based upon a multiple of proven past earnings. The way this is established can vary substantially among valuators, however, one way that is commonly used is by assessing the ‘owner’s benefit’.
The owner’s benefit is the total net income, plus depreciation, interest and salary/benefits of the owner, which can then be multiplied.
There is no exact number that it must be multiplied by, however, and it can be different for each business, and affected by general market conditions. Most valuators have standard industry multiples that they use.
These are based on a range of factors, including recent known sales figures achieved, and industry trends.
Growth Trends – Past and Future:
This is an important point which affects a business valuation. Investors and buyers will want to see the potential growth of a business so they can see where their money will go in the next 5-10 years and beyond. If a business has high potential then it will help raise its valuation.
To present this to your potential buyer, there needs to be a considered assessment of past trends, and future likely trends, as well as the impact of any active business growth plans that exist for the company.
Reputation in the Marketplace:
The reputation of your business will have a big impact on your business valuation.
For example, if your business has a bad reputation with many recent unhappy clients, it can seriously and negatively impact a valuation. Overcoming that challenge may require a pre-sale rebrand or a concerted effort to raise customer satisfaction or net promoter scores before submitting for a valuation.
A recent example of a negative reputation would be the P&O ferries debacle and the huge international publicity it has drawn.
This situation will have affected the reputational value, as well as the operational profitability value of that business.
Where a business has a great reputation then it will be far more attractive since there is less work to do. A very reputable business will go hand in hand with one that has high growth potential making it a great investment.
Assets:
Business assets will also have a key role in the value of your business. From property, land, equipment, machinery, vehicles and much more.
Location:
The location of a business has a large impact on overall value.
You may have a great business idea and business model, however, if it is in a bad location and relies solely on the location for clients and sales then it may not be an attractive investment for buyers.
On the other hand, if a slow-growing business with little success is in a thriving location, this could be a major selling point, as investors can envision how well the business could do in that location when they take over.
Staff & Management:
How many staff does your business employ? Do you have a strong and efficient management team that is vital to the success of the business? The staff a business has will always play a key role in the value of a company.
If you have a business with little to no staff, then there will be a lot of work to do to get it off its feet.
A business with a strong management team, shareholders, partners and so forth will be able to help grow the business so there will be less input required from the buyers.
These are all valuation considerations that are within your control to progress before seeking a valuation.
Margins and operating expenses:
These two metrics go hand in hand with business earnings. Seeing these factors, buyers will be able to see what the current profit is and where they could make effective changes to improve margins and reduce expenses over time.
It is surprising to note how small differences across the critical drivers of a business can significantly affect profitability, and therefore the multiple sum achieved on the value calculation. For more information on this topic, do have a chat with one of our coaches about our unique Profit Flow model and calculator.
Business flaws
Along with finding the business value, it is also important to see where the flaws within your business currently lie and how they could be fixed. These flaws may not be initially apparent, since you may be used to them, however, small changes can make big differences.
From this point, a plan can be curated with steps to get your business to that end goal, and provide a framework for how to sell your own business.
How do I grow the value of my business?
As a business owner if you are looking at how to sell your own business, you should be thinking about gradually and methodically handing down your important roles to employees. We recently touched on this point on our blog – The need to succession plan early.
This is a very attractive selling point as it allows your business to run and scale with less input from you, the owner.
This will allow you to package up the business and transfer it over to new owners far easier, as they will not need to have a large time-consuming role to help run the business. Remember, you are selling a business, not your job.
Looking at your sales and profit growth is a good indicator to see where your business could be in the coming years.
If the track record is slow, then the business could need some streamlining, whether it’s through sales and marketing processes, new employees, client relationships, the list goes on.
Finding a buyer
Finding a buyer can be tricky, especially one who is happy to pay your asking price! However, it is also important to know where to promote and market your business as a great opportunity and how to make it look attractive to new investors/buyers.
Unsure where to start?
Are you wanting to sell your business but are unsure where to start? This is a situation many business owners may find themselves in so you are not alone.
Contact us for a complimentary business review session with one of our business coaches or find out more about our Exit Coaching Programme.
