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Why 90% of Business Owners Fail to Sell: The Importance of Valuing Your Business from a Buyer’s Perspective
Are you a small or medium-sized business owner who’s considering selling your company in the next few years? Did you know that only 10% of businesses that go to market end up with a successful exit for the owners?
If you have a number in mind that you want to sell for, it’s essential to get a valuation of your business from the buyer’s perspective. This will give you a realistic idea of how feasible that number is to achieve and enable you to plan how to close the gap between the current valuation and your desired valuation at exit.
Will your historic growth rate alone be enough alone to achieve your goal or will you need to change something to increase growth to meet your desired timeframe? These are important questions that need answers if you are going to get the most from your life’s work when the time comes to move onto whatever’s next for you.
An independent valuation report will help you identify areas where your business is strong, as well as those that could use improvement to meet the standard that buyers expect. Commissioning this report well in advance of any intended exit will allow you to take action to address any areas that need improvement, some of which may take a year or more to implement.
When a buyer is considering purchasing a company, they will be looking at a variety of factors to determine its value. For example, they will consider the company’s financials, such as revenue and profits, as well as its assets (tangible and intangible), liabilities, and cash flow. They will also evaluate the business’s competitive landscape, growth potential, and market share.
One crucial factor that business owners must understand is the influence of intangible assets on their business’s valuation. Intangible assets can be easily overlooked but can have a significant impact on the value of a business. For example, a services-based company may be attracting clients based on its reputation for a strong, systemized process for solving a problem. This Intellectual Property (IP) allows the business to charge for solving the problem rather than the time it takes to solve the problem (as in an hourly or day rate). This helps to build brand recognition and customer loyalty, but if this is not reflected in financial statements, it’s easy for these intangible assets to be bypassed and undervalued in a traditional valuation.
Overall, intangible assets can be crucial in negotiations with potential buyers, and a professional valuation can help to identify and quantify their value. However, other factors can also impact a buyer’s valuation of your business. Some of the things that can reduce the value of your business include poor financial management, outdated technology, poorly maintained equipment, dependence on the owner’s involvement, poor record-keeping, or a limited customer base. Conversely, there are also things that can make your business more attractive to a buyer, such as a diversified revenue stream, a loyal customer base, strong intellectual property, a strong brand reputation, and a track record of growth and profitability.
Ultimately, the goal of any business owner is to maximize the attractiveness of their business to be acquired by addressing the risks that could impede future revenue generation when the ownership changes. De-risking the business in this way will give the owner(s) the best opportunity to exit on their own terms when they decide to sell.
In summary, if you’re a small or medium-sized business owner considering your next step for your company, it’s important to get a valuation to understand your business’s true worth and identify areas currently limiting the value of the business. Addressing these factors will make it more attractive to potential buyers, increasing your likelihood of a successful exit. Don’t be part of the 90% that fail to sell their business – take action now to ensure you get the best possible outcome.
