The Winning M&A Advisor [Vol. 1, Issue 3]
Welcome to the 3rd issue of the Winning M&A Advisor, the Axial publication that anonymously unpacks data, fees, and terms…
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As owners begin to think about selling their businesses, the first question they have is: “How much is my business worth?” They may have a vague idea of what they think it should be worth, but don’t usually have any tangible numbers to base it on. And more often than not, it’s unrealistically high in comparison to what a buyer would pay.
This disconnect between the owners’ perception of business value and that of potential buyers is very common. Owners spend years devoting themselves to their businesses, investing personal and financial resources, and often sacrificing precious time. Their business is usually the most valuable and important asset they own. However, a potential buyer’s perspective of business value is generally quite different.
Let’s look at what constitutes business value, where the divergence of perceived value occurs, and how business owners can increase their business value and make it more attractive to prospective buyers.
Determining business value is not an exact science. There are various methods of calculating value, depending on specific circumstances, which we won’t go into here. But basically, business value is a prophecy of future cash flows for the prospective buyer, whether the business is sold to an internal or external party. And, buyers don’t want to purchase businesses that are unlikely to generate cash.
Publicly held companies have a definitive value, on any given day, based on their stock price. Privately held companies have a range of values, on any given day, due to a variety of factors. Value can vary because of the type of prospective buyer, as well as its cash flow, risk profile, and quality of the business. If the purchase by a particular buyer will automatically generate higher business profits or “synergies,” that buyer can afford to pay more for the business. Thus, the value of the business is higher.
While growing their businesses, many owners make financial and operational mistakes that are actually decreasing value.
Be sure to work with an experienced accountant who can advise you on tax planning with the sale of the business in mind. See also: Have You Saved Enough to Sell Your Business?
One key strategy for increasing value is to add recurring revenue streams to your business. See: How Recurring Revenue Increases Business Value. Studies show that businesses with recurring revenue sell at much higher multiples than those that don’t.
It’s critical for business owners to identify and quantify business risks and find ways to mitigate them. See also: Avoid These 7 Mistakes When Selling Your Business.
As we’ve discussed, the question of business value isn’t an easy one to answer. And, no matter what the numbers are currently, it’s more than likely that you’ll want to increase them. Here are some steps you can take:
Taking the steps above is great starting place for you to begin to increase business value and improve your chances of selling, whether it’s internally or externally.
Download our free guide: The Guide to Maximizing Value When Selling Your Business.