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Industry Trends for Business Valuation Multiples
Industry Trends for Business Valuation Multiples

Preparing for the Sale of a Business

By Edward L. Fixen

The following list summarizes what I in my experience as a business broker are the top factors that affect and influence business owners ability to sell their business and should be considered years in advance to prepare for the sale of any business.  If you have given any thought to selling in the next five to ten years, you should be considering these factors now!

What is the Value? – Don’t wait until it’s time to sell to find out how much your business is worth.  A business valuation can provide you with not just the value of your business today which you need to know in order to determine if it meets your personal financial needs after selling.  A good business valuation will also identify weaknesses in your business and opportunities to increase value before you do sell.

 Financial Records – The importance of high quality financial records is often overlooked in small, privately-held businesses.  Increasing the accuracy and transparency of financial records not only helps you better understand opportunities for business improvements, it improves the confidence of lenders and investors, both of which are critical to getting the best price for your business.  Putting good financial records in place is something every business owner can and should accomplish several years in advance of selling.

 Depth of Management – Many businesses are far too reliant on the owner for the intellectual knowledge and/or relationships that are critical to the success of the business.  In these situations when the “owner is the business”, the necessary knowledge and customer relationships critical to the business reside with the owner.  After unrealistic pricing, this is probably the second largest factor that makes many small businesses either unsalable or reduce the fair market value.  The value and salability of a business can be dramatically increased by; 1) developing and mentoring key employees that in essence allow you to replace yourself or 2) having an exit plan to bring in a new owner and stay on as an employee for an extended period of time before you are actually ready to retire.

Stability of Earnings – This factor takes into consideration the age of a business, how volatile or stable the earnings have been historically and how the profitability of a business compares with industry peers.  To help identify improvement opportunities, benchmark your business growth, profit, balance sheet and other financial ratios against industry peers to identify strengths and weaknesses.  Developing sales strategies to maintain stable or growing sales and operational strategies to improve profitability through expense reduction will definitely improve your bottom line, increase value and the salability of any business.

Business Growth – Business development strategies and capital investments that help your business grow faster than the overall industry growth rate will increase the value and salability of your business.  The key here is to find ways to have managed growth exceeding your industry peers.  Develop a strategy to acquire customers in high growth industries and explore growth through acquisition as an opportunity for strong and successful growth.

Customer Base & Concentration – A key risk consideration that significantly affects business value and salability is the degree of reliance on a small number of customers for a large percentage of revenue.  This is a very common problem for many small business owners.  While taking on a large customer can be instrumental in growing sales, a disproportionate reliance on one customer is generally viewed as high risk.  To the degree practical, it is important to develop a diverse customer base over time and reduce over-reliance on any one customer.  This factor alone can reduce the value of a business as much as 30% plus depending the degree of concentration.

Contracts – The development of customer contracts is a very effective means of increasing business value and salability, not to mention peace of mind.  Help your customers understand the win-win that results with long term contracts.  It is usually possible to offer better pricing and terms without compromising profits when you can count on annual sales from a customer and more efficiently plan for the delivery of your products or services.  In turn, the value and salability of your business will increase considerably because future income streams become less risky and more predictable.

Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB).  Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid size, privately-held businesses throughout Southern California and can be found at www.BusinessQuestInc.com.

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