Before you can price something, you should have a good understanding of what price a reasonable buyer could be willing to buy it for. This may look like a cliché you might encounter in the first week of your Economics 101 class, but when it comes to selling businesses, this rule is often – or much more often – ignored by small business owners who have only a vague understanding of business valuation and the actual market value of the enterprise.
This error normally results from the combination of two related but distinct terms: price and value. While price is a concrete number, value is much more variable and subjective, and getting a good price means understanding who your business is worthwhile to and why.
To understand value, understand the market
A business owner can look at their company and see its value in terms of worker numbers, overall revenue, and brand penetration. However, a potential buyer may experience high overhead costs, a low return on investment, and a brand that is too established to be easily refreshed. Understanding a company’s value means understanding the attractiveness it’ll have to a potential buyer.
For example, a buyer looking to enter your market may place a high value on your physical assets and workforce insofar as they provide a ready-made channel for bringing latest products or services to your region, while a competitor may see value in consolidating its market share by combining its firms with their very own.
The ability to discover the strengths and weaknesses of various features of your business and translate these strengths and weaknesses into price is the first step towards finding the right buyer.
Translating a value into a number
The value of a company does not lie simply in its specific assets (in fact, some assets, e.g. corresponding to propertymay end up to be liabilities that need to be liquidated before being sold), but in a way that these assets could be used for future profits.
That’s why it is vital to have them make a proper valuation of your company by experts who understand your industry and can quantify a number of intangible assets corresponding to customer trust, brand, infrastructure and worker experience.
Having a skilled business valuation will give you the confidence to start marketing your business to potential buyers with the confidence that the price you are asking for is fair, reasonable and accurate in relation to the current value of your business, and will put you in a stronger negotiating position when it is time to close the sale.
While there are many different firms offering appraisal services, many small business owners select to work with business brokers who offer a comprehensive approach to business sales, helping with every thing from pricing to marketing, due diligence and final negotiations.
Even if you’re unsure yet whether you want to sell your business, a business valuation can serve many different purposes and help you determine which areas of your business are price investing in if you want to make it more attractive to future buyers.
Remember, if you start exploring your business valuation options today, you’ll be higher prepared for any sudden opportunities that will arise in the coming yr.
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