How to Value a Business
- How do you measure what someone is willing to pay for a business?
- What do buyers consider valuable?
- How do you price your business to sell?
At Benchmark Business Group, these are questions our business brokers answer every day, and do so with remarkable accuracy when creating an Opinion of Value. In addition, our Value Realized Coaching for Sellers is designed to help you see your business from the buyers point of view, and prepare yourself and your business to successfully move through the selling process and realize maximum value from your business. Working with a BBG business broker ensures you can be confident in the valuation of your business and ready to engage with qualified buyers.
Our business brokers are trained using several evaluation methods, including the Value Builder method made famous, by John Warrillow, in Built to Sell. We take the time to learn about your business, your assets, cash flow, track record, and your growth prospects, to determine a price that is reflective of what we feel the market will pay. At the end of the day a buyer must be able to make payments to the bank from the money the business generates. Pricing your business is not just about establishing the listing price, we also factor in elements such as how much risk you want to carry and how long you’ll need to be around for the transition.
Most small to medium-sized businesses are typically valued using the Income Approach, by making a determination of how much net cash flow would be available to a buyer, then multiplying that amount by a number called the Multiplier. The Multiplier is reflective of the appropriate Return on Investment the business will provide the new owner (multiples generally range between 2 and 6). Our history of selling businesses shows that while other evaluation methods exist, this is the method that brings a valuation the business owner is willing to sell their business for, and will attract buyers. We look at each business and each business owner's situation to identify the pricing that will lead to attracting qualified buyers. Currently, over 60% of our businesses for sale will attract qualified buyers.
There are several key factors that impact the value of a business including:
- Financial Performance: Whether revenues and/or profits are increasing, decreasing or flat over time.
- The condition of the business financial records.
- Valuation Teeter Totter: The amount of cash flow in the business.
- Growth Potential: Whether the business is increasing or decreasing in market share.
- The percentage of new customers added each year.
- The buyers motivation for purchasing and plans they have for your business.
- The Switzerland Structure: The existence or lack of a succession plan for key people.
- The stability, longevity and experience of the staff.
- The diversity and age of the customer base.
- Hub & Spoke: How dependent the business is on the selling owner.
- Whether the business is systems-dependent or people-dependent.
- Recurring Revenue: How much ongoing, consistent revenue the business produces.
- Customer Satisfaction: How satisfied your customers are with your service.
- Monopoly Control: Whether the business is seen by the public as a brand or a commodity.
The more of these factors that can be described favorably, the more valuable a business will be to a buyer. To the extent that they cannot be, they can be corrected, with a focused effort over time. The amount of time will depend on the factor in question. It is highly recommended that businesses wanting to improve their value seek professional business coaching. It has been demonstrated and measured many times that businesses that attempt to change their results in a meaningful way without professional help have less than a 4% chance of implementing change. With help from a professional business coach, the chances rise to 80%. If you’re considering preparing your business for sale, answer this question: “If you knew exactly what to do to give your business top value and you had the self-discipline to act on what you know, wouldn’t you have already done it?” Working with our firm, you gain access to our proven business development systems, can draw on the expertise of our business brokerage services, and utilize the knowledge and accountability of our business coaches who are certified in the Value Builder System made famous in Built to Sell.
Take your first step and contact us to receive an Opinion of Value on your business. We will provide a complimentary Opinion of Value for businesses within our target market and for a very reasonable fee for those outside of our target market. This will give you a starting point to know what the market is most likely willing to pay for your business as it is now. In this process you’ll engage with one of our professional business brokers to gain a better understanding of the market value of your business, how we arrived at the price, and why.