The growing number of Baby Boomers looking to retire will see an increasing number of businesses being placed on the market for sale. Combine this with the increased number of executives looking to enter the world of the self employed. These executive will be seeking increased control over their own future after being jettisoned from the corporate world as a result of the slowing global economy. These two factors are likely to see an unprecedented number of businesses change ownership over the next few years.
Research shows that nearly half of all business owners planning to sell their business are unaware of how much it is worth. The problem is more significant for the smallest businesses, with only 37% having a clear idea of the sale value of their assets.
These figures should not be surprising. It could be said that valuing a business is as much an art as a science. There is no precise formula that applies to all businesses in all sectors, nor even to all businesses within a sector. Instead, an accurate valuation will depend on consideration of a number of factors.
- The size of the business – larger firms tend to be viewed as less risky and so attract a higher price, even if they are less efficient than smaller competitors.
- The prospects for future growth – buyers sometimes pay more for businesses with high growth rates because they repay the investment more quickly. You might consider selling before turnover and profits level out.
- Diversification – if you have a wide ‘business mix’ it can affect the sale price, since buyers may only be interested in one area or market.
- Customer base – the size of your customer base is important, but so is the quality of your customers and the cross-selling opportunities.
- Profitability – although generally the higher the profits, the higher the value, some buyers might prefer a business with areas in which large efficiency savings can be made.
- Cashflow and financial management – the size and certainty of cashflow, and the strength of the balance sheet and financial management are all vital factors.
While you will obviously not wish to undervalue your business, it is also important not to overvalue it. An inflated asking price will discourage buyers, or make them think you are not serious about selling. Ultimately, the value of your business will be determined by the laws of supply and demand. If there are plenty of willing buyers for your type of business and few sellers, you will get a good price, and if you can allow buyers to set a price through competitive bidding, so much the better.
While a business is only ever worth what a prospective buyer is prepared to pay for it with a little planning, there are ways you can increase the value of your business. If you are thinking about exiting your business and would like to maximise your after-tax value, please call our office to discuss your specific circumstances.