How to value a business: maximising ‘sellability’

http://www.youtube.com/watch?v=WazmOr2JBzw

In the previous comment in this series, we highlighted the large number of hidden variables affecting the value of a business and thus why ‘ballpark figures’ tend to be wildly out.

Now, we look at how easy it can be for owners to improve some of those variables to make their business significantly more ‘sellable’ – and valuable. Along the way, you’ll see why it really is never too early to start preparing for a sale: the longer you have, the more sellable your business can be.

The basics: numbers

If you have ever bought a used car, you’ll know the value of a full service history from a reputable garage. It doesn’t just tell you that the car has been maintained, it builds confidence that you are not being sold a pup. In the same way, complete reports and accounts, signed off by a reputable firm, don’t just provide the basis for financial calculations, they are the first step in demonstrating competent, trustworthy management and thus the likelihood that yours has been a well run business.

Building an accurate picture: from leases to staff contracts

The essential point here is that buyers will pay for what they can see and worry about what they can’t. This means getting your house in order including, for example, formal staff contracts, good paperwork for premises, capital equipment and leases, and the resolution of any potential liabilities that you know may yet rear up to bite.

Strong businesses are more sellable

Often, owners only appreciate how strong or vulnerable their business is when they start to look at it from the point of view of a potential buyer. You may have a long and profitable relationship with a major customer, but any business that is overly reliant upon one executive, or one client, is vulnerable. In contrast, buyers love to see a business which has recently secured new contracts and which is helping its best managers to fulfil their potential. Talking of which…

Completing the picture: buyers don’t pay for potential, but…

Brokers stress that buyers pay for what a business is, not what it could be. This is true: the only way to realise the value of potential, is to realise the potential. That said, no one wants a business without it, so it’s up to you and your advisors to compete the picture by helping buyers to see the future. What new markets are immediately available? Have any would-be collaborators or JV partners approached you? Do you have part-developed products or services you have not got around to launching?

A better business

Of course, attending to such factors will not just make your business more sellable, it will make it a more profitable and more enjoyable to manage as well. Indeed, if it improved things so much that you decided not to sell, you wouldn’t be the first!

For advice on maximising the sellability and value of your business, contact your local office of The Business Partnership. To get an immediate ‘Sellability Score’ estimate of how sellable your business is now, simply complete our 13 minute questionnaire, the link to which you can see on our Home Page.

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