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The 4 Factors That Determine the Value of Your Business

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How do you make your business worth as much as possible and make it appeal to many more buyers at the same time? What makes a $500K business different from a business that is worth $750K?

Aside from the annual profit, there are a litany of factors that will contribute or detract from the value of your business. For simplicity, we classify these factors into four larger categories: risk, transferability, growth prospects and verifiability.

Minimizing Risk in Your Business

Risk can be classified a number of ways, there are macroeconomic risks that are largely out of your control as a small business owner. Occurrences such as the global financial crisis of 2008 and COVID-19 outbreak both fall into this category.

If your business is too dependent on you as the owner, buyers will also see this as a risk and will detract from the businesses value. A great way to minimize this risk is to hire and train great employees, or to hire some of the business processes out to qualified professionals. For instance, you can look at ways to hire out your public relations or marketing.

There are various other market conditions that may add risk to your business. For instance, if your business only offers one product or service, that is generally seen as more risky than a business that offers multiple products and services.

In addition, consumers look to the internet for reviews now more frequently than they ever have before. If you have developed a great reputation and have clients that keep coming back to do business with you, your business will be much more valuable and easier to sell than a business that is trying to run away from a bad reputation. For this, you should understand the overall business valuation process and its purposes. Here, business brokers can be helpful to serve the purpose well.

How Transferable Is Your Businesswomen-1209678_1280-315x210

When an individual or small investment group is looking at potentially buying a business, they will ultimately be making one of the largest purchases of their lives. In order for this buyer to write such a large check for your business, they need to feel comfortable that they understand how to manage it inside and out.

If you have clean and easy to understand operating procedures buyers will be able to picture themselves as the new owner of the business. If there are skills that they don’t feel comfortable replicating or if it is unclear who on your staff does what, buyers will ultimately feel uneasy about the business and won’t make an offer or will make a much lower offer.

In general, the more organized your business is, the more transferrable it will be. You should have your employees trained on who does what, how it is done and exactly when it was done. These processes should also be documented in some sort of a training manual so the potential buyer feels as though they are comfortable in all of the operations that are crucial to the businesses performance.

Business Growth Prospects

There is a much greater demand from buyers in industries that are growing such as Ecommerce, business services and consulting than there are in industries that are declining or moving overseas such as manufacturing and lodging.

In addition to the trends of your industry, if your business has seen consistent growth with you in the driver’s seat over the past 3-5 years, this will make your business more valuable. If you have a business with residual clientele, this is seen as valuable in the eyes of buyers.

How Verifiable Are Your Business Figures

If you are like most business owners, you started your business on a tight budget and did as many of the operations yourself as possible. If you were able to grow the business, you may have relinquished some control and hired a bookkeeper and CPA to do your taxes and keep clean financial statements. If you took this extra step, it will pay off in a major way when you look to sell your business. Buyers like to be able to trace where every dollar went and know exactly what a business makes.

It is also an unfortunate fact that many businesses still make most of their transactions on a cash basis. There are still many business owners that take cash out of their register to pay for their materials and supplies. While the books may balance at the end of the month, it is still hard to show a potential buyer where cash is going and they are going.

So What Does All of This Mean Your Business Is Worth?

Businesses are generally valued on a multiple of their annual profit. Depending on how your business stacks up in the above criteria, that valuation can vary from 1.8 X all the way up to 3 X. The most popular options to sell your business are: selling to a current employee, selling to an investment company or selling through a broker. You can read more about the options available when selling your business in this article. In addition, If you are curious to see what business for sale listings look like, have a look at BizBuySell.com or MidMarketList.com.

About the Author

Mark Woodbury is Co-Founder and CEO of Minerva Equity, a lower mid-market private equity company that makes majority investments in US based businesses that generate $1M – $5M in annual profit. Feel free to connect with him directly on LinkedIn.

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