As the saying goes, change is the only constant in life — and in money. Financial markets can be unpredictable and unruly, as we have seen of late. But volatile markets don’t necessarily mean that now isn’t a good time to sell your business. It fact, a well-run business is a particularly attractive investment when other investments are uncertain.
The key to selling a business in a time of uncertainty is to focus more on what you are selling than on who might buy it. That is, is your business ready to sell? Is it consistently making money? Is it growing? Do you have a strong management team? Do you have clear goals and processes for meeting those goals?
A well-run business will find a willing buyer in any market. A poorly-run one will not.
The first step to preparing your business for sale is to determine what it is worth. In fact, a business valuation can be helpful at any stage in a company’s life as a reference for performance.
In general, the value of your business is influenced by many factors, including:
- The nature and history of your business.
- The financial condition of the business.
- The companies earning capacity.
While there is no one definitive formula for a valuation, there are three fundamental ways to measure a company’s worth. The method you choose depends on your motivation to sell and the current state of your company and industry.
1. The asset approach. This method bases a company’s value on the sum of its assets, both tangible and intangible. This route is best for distressed companies or those that will liquidate in the near future.
2. The market approach. With this system, a company’s value is determined by comparing the business against companies within a similar industry, region or size. This is ideal for large, robust and healthy companies that stand out among their competitors.
3. The income approach. This valuation strategy determines a company’s value from expectations about its ability to generate economic benefits in the future. Since this approach is based on future expectations, the income approach uses capitalization and discounting to establish value. This method is ideal when past income has been steady and would be a reliable predictor of future income.
Once you have a sense of your business’s value, it’s time to strategically leverage its worth.
Recast your financials to tell a compelling story. You have an intimate knowledge of the history and inner workings of your business, but that doesn’t mean investors will see it the same way you do. Dig into your company’s financials and organize them in a way that provides a comprehensive view of what drives your business forward and what slows it down. Illustrate what you’ve built and where your business is heading.
Address customer concentration issues. While you may be proud of your one or two huge clients, savvy buyers are wary of businesses with a highly concentrated customer base, and rightfully so. What happens to your company if your top customer decides to take its business elsewhere? If more than 20 percent of your revenue stream is coming from one source, it’s time to think about diversifying your revenue base. Otherwise, the offers you receive for you business may be underwhelming — or nonexistent.
Build strong leaders. Buyers want to invest in sustainable companies. First and foremost, this means having a solid leadership team that can drive the company forward when you are no longer in the driver’s seat. If you have any weaknesses or gaps in this area, it’s time to get the right people in place, and get the wrong ones out.
Get organized. Review all existing documents, including contracts and compliance records, to ensure everything is in order. Project future growth to guide decision-making and identify where investors may see risks so you can address them.
In business, as in life, it can be impossible to predict what opportunities will surface next, so it may be advantageous to enlist the help of an adviser to clean up your business and address risks before investors spot them. After all, while some factors, like the state of the market, will always be out of your control, a well-prepared business is ready to sell at an attractive price whenever the right opportunity strikes.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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