Selling Your Business – What Creates Business Value When You Sell?
- When selling your business value is primarily determined by the profitability of your business particularly looking at your last 12 months on a rolling basis. Namely, your company will be judged the same way you judge your salespeople. “What have you done for me lately?” Not based on what your business did 3-6 years ago.
- Your company will be judged on the last 3 years of profitability results for financing, i.e. the past can only hurt. Namely if you have had a very poor year in the last three years that is likely to lower your price even if your last year was very good. This is because it will reduce the amount of financing your business buyer can obtain, which does affect how much they can pay you.
- Goodwill is an accounting calculation not a function of years in business. Namely, goodwill is calculated based on the overall value of the business less hard assets. The overall value of your business is determined by profitability above. Please remember the second bullet point. No one tends to care what you did 5 years ago or that you have 10,000 contacts.
- No buyer cares what your accountant’s, you, (or my) formal business valuation is.
- Buyers care about what it is worth to them and what they will have to pay. What they will have to pay is usually a function of who else they are bidding against. This requires making a broad market across likely qualified buyers and then creating an auction environment. Emotion counts. Someone else wanting the business creates fear of loss which raises prices.
In summary you should focus on generating the highest profitability possible. Your business broker should focus on creating the broadest market and creating an auction environment to generate the highest possible bids for your company.