This article appeared in the May / June 2018 edition of The Value Examiner NACVA article click here
Topics: business valuations
Much is written about “value drivers”; strong financials, recurring revenue, desirable industry, scalability, impressive customer list, intellectual property, etc. However, I think of value drivers as almost prerequisites to attracting buyers for lower-mid market companies. But eliminating “value detractors” is frequently even more important to buyers because it helps minimize risk. In my opinion, the top two value detractors are: 1) owner dependence and 2) customer concentration.
Less than 25% of small businesses ever sell. Engaging an exit planning advisor can be the difference between liquidating and maximizing the after-tax return from the many years a business owner has invested in building and running the business.
Statistics show that 50 percent of new businesses fail within the first year. That number jumps to as high as 95 percent within five years. Knowing this, if you’re currently running a successful business and raking in profits, it has tremendous value. And even though things might be going quite well, this is exactly why selling your business makes sense - even when things are good.
Building a business is an enormous investment. It is not just monetary, but an investment of passion and tremendous amounts of time and effort. When the business is near the peak of success, why not look at cashing in on that investment?
There are seven good reasons below to look into selling a business now. Buyers exist who have various reasons for investing in an established business.
It takes preparation, commitment and advice from trusted adviors to hone a business into something that shows a buyer the potential future value of what has been built. Depending on the size and type of business some or all of these reasons may apply.
- Consistent growth: If the business has weathered the economy well and shows gains for the past three years, it is a desirable business. Buyers are looking for a sound investment to step into. Revenue increases indicate a secure growth potential.
- Expanded customer base: A wide customer base indicates a solid foundation. A business that has recently shown success broadening its base is much more attractive. A business that is penetrating new markets shows an attractive future for the buyer.
- Victims of downsizing: Senior executives who have lost a job are looking for their own business. They are experienced business professionals and want something they can manage that offers a more secure future with low risk.
- Business investors: There are investors looking for growth businesses to resell at a later time. They want to further develop the business and enhance its value to sell at a profit.
- Family owners: Families looking for solid business opportunities. They want to spend more time together, eliminate long commutes and have an income that does not rely on separate jobs and locations. An established business with solid profit margins offers just what they want.
- College graduates:Recent marketing or business graduates see better futures for themselves in their own business. They want to enter a stable business and put their education to good use to build their financial independence.
- Diversification: There are current business owners who want to diversify. Selling a business that is solid to another business owner can increase their income and help them weather storms if their current venture has slowed.
The market is attractive for many buyers. Selling a business now can bring a premium price if the owner is well prepared. Preparation to make a business more attractive should start now. Making the business as attractive as possible increases the potential for selling a business at a peak profit.