For many small business owners, their business is their most significant asset and, for many, one that is expected to help fund their retirement. But what is your business really worth, and what sets a high-value business apart?
Every business owner is naturally curious about just how much their business is worth. However, for every business that sells at an attractive price, there are others that struggle to sell, let alone fetch a premium. The question is, what makes a difference?
When you come to sell a business, the first question is, what are you selling? In most cases, this is fixtures and fittings, plant and equipment, stock on hand, and the business’s goodwill. Generally, a buyer won’t want to purchase your liabilities or business structure, nor will they want to collect your outstanding debtors. Most business sales become sales of business assets.
Goodwill
Most business assets are relatively easy to value, with the exception of goodwill. The value of plant and equipment and trading stock can generally be agreed upon. The tension tends to be around the value of goodwill because goodwill is made up of many intangible assets that can’t be readily quantified.
We can all agree that these assets have value, but the question is, how much? Goodwill is basically the value of the business’s future free cash flow. Depending on how your business is structured, it is the value of the profits the business can generate in the future. This is what a buyer is prepared to pay for.
If a buyer has a reasonable certainty of future profits and free cash flow, then this is worth something. By comparison, a start-up business will have a higher level of risk and no certainty that profits can be generated. In general, a new business may need to trade for some years at a loss before it can establish itself and generate profits. Goodwill is what you are prepared to pay to avoid the risk and the ‘time to establish’ factor.
So, what influences business value, and what will people pay for?
- A history of profits, profits, and more profits
- Returns on capital invested (better than 30%)
- Strong growth and growth prospects
- Brand name and value
- A business not dependent on the owners
- A robust and verifiable customer list
- Monopoly income – exclusive territories
- A sustainable competitive advantage
- Good systems and procedures
Getting a price that is widely different from the norm is possible. Unique businesses, unique circumstances, and unique opportunities can always produce ‘an out-of-the-box’ price. If you can build something unique, then you may achieve a price beyond normal expectations. However, the market will set the price.
If you are planning on selling your business, identify who your buyers might be. There could be a purchaser who is prepared to pay a significant premium to own your business because of the accretive value or because it is pivotal to their growth strategy.
And, even if you are not thinking about selling your business, you will one day. If you build your business with this in mind, then you should look to do the things that will grow your business value from year to year. Contact us for help on your business valuation or how to grow your business value.
