Making Your Business Saleable
February 10, 2013 1 Comment
Even if you are not the sort of person to build a business to take it public or sell it to a strategic buyer,it makes sense to build a business you can sell. After all there might be a day when you can no longer work and your business might be one of your major assets;An asset you can no longer manage or your children might not take to business or perhaps a particular business despite all your efforts to groom them etc.So who knows when you might find yourself using BizBuySell or something else along the lines?
With the day-to-day demands of running businesses, most owners put off getting a valuation until a sale is imminent. But its a good idea to start treating the valuation of businesses as an integral part of running them. If you like to think you’re building something that you can sell someday and don’t focus on valuations, you don’t know if you really are. BizEquity and uValue, an iPhone app developed by Aswath Damodaran, a valuations expert at the Stern School of Business at New York University, might be places to begin.
There’s also something to be said for having a real person trained at valuations come in.Your Chartered Accountant would be the first person to tap.Business brokers, who routinely run valuations as part of marketing a company for sale, are another option. While their reports are not as detailed as the certified appraisals required by some buyers and in some legal proceedings, they tend to be more detailed than the reports from online services. But before engaging outside experts, virtual or non-virtual, it helps to have at least a basic understanding of the valuation process. Here is what you need to know:
There are essentially three methods for calculating the value of a business. The asset approach, typically used in distressed situations for the sale of defunct businesses, determines a company’s value by adding up its tangible and intangible assets.The general idea is that buyers can reuse the assets more productively in their own businesses. The market approach, probably the most common way to value a healthy business, produces a valuation based on a multiple of the company’s past earnings. Part of a valuation expert’s job is to analyse the “comps”, or the multiple of earnings at which comparable businesses have been selling, to choose the appropriate multiple for your business. You can also visit business-for-sale websites like BizBuySell to get an idea for yourself.A factor that figures heavily in the size of the multiple is the type of buyer you think might want to acquire your business. Strategic buyers tend to pay more than financial buyers, like PE funds. A second,is the strength of your management team. If you are central to the running your business, the multiple will suffer. Buyers often want businesses that will largely run themselves under competent managers.The third approach, the income method, is forward-looking, relying on the present value of expected cash flow. This method tends to paint the fullest picture of a company’s potential, but prospective buyers of small businesses may view it skeptically.
By using valuation as a planning tool ,you can isolate variables that drive valuations higher.This allows you to adjust your company’s ranking on important metrics within your competitive set and unlock the value of your business.
Most small business owners find it difficult to explain the value of their businesses to prospective buyers.Most just want a figure they believe they can retire on or will provide for specific expenses.But this is an approach that’s unlikely to interest prospective buyers unless they can scent a killing.Not all businesses are unique and unduplicatable .Buying a business might save a buyer time and the hassles of starting up and getting a business off the ground,and a list of suppliers and prospective customers,but at a certain point starting a new business starts looking better than paying premiums for someone else’s lifestyle.By having a valid explanation for your asking figure, you can hope to do better.Periodic valuations help you better your explanations.