Occasionally a small business owner will ask how much is my business worth? That is a loaded question. It all depends. In a divorce your soon-to-be ex will say it’s worth $10 million and they want half. Whereas you may treat is as just a job and there is no value without you being there. If you are the only one working in the business it may only be a job. But it can be more.
In a sale situation, the true value is determined by the buyer. The value is created by you having what they want. It may be time to assess your business to understand how you’re doing and what the future could hold. Here’s are some things buyers look for.
- Business relationships – customer list, customer relationships, staff, vendors, etc. Something that would take time to develop, whereas they can buy it and have it instantly.
- Business reputation. Another item that takes time to develop.
- Intellectual property- patents, process, copyrights.
- Your location, physical facilities or territory that you serve.
- The whole business – the process, the customers, the profits and maybe you.
The value depends on what the buyer can do with what you are selling. As the seller you are looking to maximize that value to the buyer. Take a step back from your business and look at it from the outside. Can the buyer reduce the costs through a higher buying volume? Could you combine administration and decrease overhead? Can they cross sell to your customers and increase their sales? Can they eliminate subcontractors and decrease their costs? Can they add a new territory or product line to their existing business? Can they take your business to the next level and increase the profits? There are many reasons why someone would buy your business, sometimes only known by the buyer.
When looking to increase the value of your business consider the following:
- Document your processes, standardize as much as possible. The more fly-by-your-pants or customization the harder it is to scale the business or have someone else replicate your results.
- Focus on reoccurring revenue. When the business is bought there will be sales that first day. It increases the chance of success for the buyer.
- Keep the business up to date with a focus on improving profitability and cash flow.
- Work on the business instead of working in the business. The more involved you are the more dependent the business is on you and harder for a buyer to step in.
Always keep a watch out for your optimal buyer. Similar to your ideal customer, there is an ideal buyer. The more you know what the buyer is looking for the more you can work to increase the value.
A small business can be just a job but it could be more. Always prepare your business as if it were for sale. If you build a healthy business with enough flexibility, you’ll always have options. After all, freedom is what owning a business is all about.
By Mary Guldan-Lindstrom, CPA