As you consider selling your business, it’s critical to look at its value. But most businesses actually have two values: the “academic” value, determined by a professional business valuation, and the “true market” value. The academic value is arrived at with a formula based on the firms’ tangible assets, cash flow, industry averages and multiples. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay.
For many small and mid-sized businesses, tangible assets – e.g., equipment, vehicles, real estate and inventory – may be relatively scarce. In some small businesses there may be no hard assets at all. Instead, their value is based on intangible assets, such as reputation, market share, employees, proprietary processes, customer lists, location and business relationships.
To maximize the fair market value of your business, capitalize on those intangible assets.
Develop Key Employees. Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. If you aren’t already doing so, start delegating responsibility to key employees and involve your senior staff members in the decision making process. Demonstrating that your company’s success rests on your team, and not just you, will pay off at the time of sale.
Document What You Do. Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.
Build Relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships may be your most valuable commodity. If you’re overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts.
Improve Cash Flows. A prospective buyer wants to see the “true cash flow.” And, of course, in the business world, cash is king. Be sure you are driving all income to the bottom line.
Review Your Assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
Find and Build Your Niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.
Remodel, Clean and Organize. What’s the first thing anyone does when they put their home on the market? They freshen things up and make sure everything is in its right place. It is peculiar that, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.
Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep your focus right until the sale is complete.
Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary to name a few. Remember, you only have one chance to sell your business, so you want to do it right.