One of the major reasons why you start and build a business is to be able to sell it at some time in the future for a profit.
So… What are the factors that will maximise your selling price?
It’s really important to understand this early so that you can put in place the necessary systems to ensure that you build a business that is sale-able.
I have these discussions with clients all the time. Despite the goal to maximise a potential sale price in the future, I always advise client’s to assume that they get nothing for their business when they want to get out. This way we ensure that wealth building strategies are put in place along the journey, harvesting the profits and cash flow to build assets outside the business. This is really important due to the fact that there could be a major economic downturn or some other event at the time you wish to sell – the result, there may not be a market to sell to or a severely depressed market resulting in a substantially reduced selling price.
With this in mind, here are my tips:
- Purchasers are effectively buying future profits. Therefore, the size and regularity of profits will have a direct impact on your potential sale price. It’s not how long you’ve owned or worked in your business – sweat equity means nothing to your business value. If your business holds long term, profitable contracts, your business will almost always attract a premium when sold.
- How reliant is the business on you? The more the business is reliant on you, the less the business is likely to be worth. Purchasers in general are looking to buy a business, not a job! That is why McDonalds franchises command premium prices. People and systems run the business – not you, the owner!
- Rights to unique established brands will generally result in a premium sale price. If there are special brands that you have rights to, make sure that you tie up these rights legally.
- Unique products and/or services will always attract a premium. However, once again if there is no legal IP protection in place, the value of your business will not be maximised.
- If your business requires a high level of technical expertise to operate, your business may not be worth as much as you think. The need for high levels of expertise may make you vulnerable if this expertise is lost for some reason. A business with documented systems and training procedures will be more valuable than complex businesses requiring high skill levels.
- The more stock and/or debtor (receivables) that the business must carry, the less you will get for your goodwill. This is because a purchaser will need access to the finance to fund working capital as well as to fund the purchase of the business – thus requiring a larger investment for the purchaser.
- A business in an industry with potential to grow will potentially be worth more than one in a mature or low growth environment. However, the comfort of operating in a mature industry with predictable sales and profitability will provide comfort for some purchasers.
Of course, this list is not exhaustive. All I aim to do is make you aware of some of the factors that will influence the value of your business. Keep these in mind as you start or build your business.
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