Key price and value drivers
Knowledge is power. Understanding the value of your business affects your ability to negotiate a fair price when it comes to selling.
The price at which a private business sells is based largely on how much a buyer is willing to pay—a decision that depends on a number of factors, including potential synergies with the seller, current market conditions, a business’ competitive position and the motivation of both parties to transact. Still, understanding the value of your business is an essential starting point when seeking a potential buyer.
As a business owner navigating the complex selling process, you must be armed with the necessary knowledge and current market information to negotiate confidently and complete the sale in accordance with your personal goals.
Here are some key factors and considerations that may affect the value of your business:
1. Cash flow
A business that shows stable or growing cash flow trends, supported by consistent profit margins, is typically more attractive to potential buyers. Having your financial affairs in order and systems in place is also critical poor and unreliable reporting capabilities will detract from the value of your business.
Never underestimate the value of your management team, as it’s key to ensuring your business will continue to run smoothly after you’re gone. A strong management team and a workplace free from dysfunctional behavior or excessive turnover can add tremendous value to your business
3. Business differentiators
Businesses of all sizes should be aware of the key differentiators that drive their value. For example, your value will be higher if you’re a leader in your industry with a strong reputation, recognizable brand and advanced technology. Smaller or less-established companies may also have a higher value than their competitors if they’re perceived as an innovator or demonstrate strong growth potential.
4. Customer base
If you or a member of your management team were to leave, would your business still have a customer base? Purchasers place a higher value on companies with a diversified customer base whose relationships are shared among the management team and committed to long-term contracts. Dependence on a small number of customers or key sales relationships that reside solely with the owner are considered significant value detractors.
5. Product or service offerings
A product or service that can easily adapt to changing industry conditions is a huge advantage to a new owner. Taking the steps now to make your own offerings differentiable and scalable will add value to your business.
6. Labour force
Ensuring your employees are adequately trained is key to ensuring your business’ value in the market. Review your hiring and training practices to obtain, train and retain the best people. Prioritize a positive working environment where staff are encouraged to perform to the best of their abilities.
Know the value of your business.
Your decisions and actions on a daily, monthly, and yearly basis can positively affect the value of your business. For your business to rate as highly in the market as it does to you, continue to review the above factors and make improvements to make future business decisions easier.
It's often said that business valuation is more of an art than a science. While there is a certain amount of professional judgment required in analyzing many of the aspects noted above, developing a proper basis for that judgment comes from years of M&A experience.
If you’re looking for a business advisor who can analyze the predictive nature of historical cash flow, assess the inherent risks of a business and help form your pricing expectations, contact us today. Let’s uncover the value of your business.