Unfortunately many business owners think that their companies are worth more than they realistically are.  The number one, numero uno, reason that businesses don’t sell is an over-inflated self-perception of business value.  Business valuation and sales price are different and helping business owners understand that when there is a significant difference between the two, they should consider working on increasing it’s value through evaluating value drivers.   The problem is that most entrepreneurs don’t understand what make their company valuable.  Although each company is different, there are a few basic measurable metrics that every buyer looks at as it evaluates the purchase price.

Value drivers are those particular areas that should be focused on by the seller before they put it on the market.   These areas should be cleaned up, easily defined and metrics provided to any potential buyer.  I’ve said this in the past, and I will say it again, and that is selling your business is like a beauty contest.  Beauty is in the eye of the beholder, thank the lord my wife has a wide definition of beauty, and a business has to be attractive to only one buyer to make the sale.  Not every person has the same taste, but there is a general agreed upon perception of what most people would call attractive.   Take the typical bell curve analysis and you are looking to set your company in the 75% section where most buyers would look at your business sale offer and say, I’m interested.

Value drivers require preparation and execution to spruce up your company before it goes on the market.  Examples of value driver are cleaning up the financial statements, putting projections and budget together and even updating your business plan.  The financial statements are the best indicators of the future success of the business.  The cleaner the books are then the better they can be relied upon by the buyer and the bank for financing.  Take the time and make you financials right and ready for them to be scrutinized.

After financials the next large concern for buyers is the management and employee situation.  A buyer is very concerned that once the seller leaves, the employees will jump ship and everything will fall on them.  As a value driver a seller needs to show that they are not required to be in the business day to day to make it successful and that the remaining staff can handle the business.  If you are working 60 hours/week and your company has been around for 10 years then how many hours do you think I, the new buyer, will have to work?  You already know where all the problems are and yet you still have to work that many hours makes a buyer scared.  It would take a very unique buyer to step in and take over where you left off in that situation.  I’m not saying they don’t exist but your goal is to make the company available to as many buyers as possible.  Find some key employees and get down to 20 hours/week before you try to sell your business in order to increase your business valuation.

The final large area of value is in your customer base.  Look at your current clients, as compared to the last 3 years and rank them based upon a percentage of annual revenue.  Evaluate what percentage of your annual sales are in the top ten customers.  The concern from any buyer is that when the seller leaves, then the clients will also.  You will need to be ready to address this concern with your buyer.  The ideal would be that you have no single customer over 5% of your annual revenue and the average length of time for your top 10 customers would be over three years.  If you are not there yet, then look at how you can diversify or how to make the buyer less concerned about losing those top large clients.   

Maybe it’s not time yet to sell your business as you review the value drivers and that’s ok.  Strengthen the company before you go on the market and get lean and mean.  Cut the weak product lines, eliminate the non-producing employees, look at your customer base and focus on those who help the bottom line the most.  It’s unfortunate that so many sellers list the business and try to convince the buyer of  what they can do to improve the value after they own the company.  To maximize your sale value, you implement the value driver before you sell it and more buyers will look at your business as beautiful.

This entry was posted on Monday, October 26th, 2009 at 10:06 am and is filed under Sell Your Business, Exit and Answers, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.