Understanding your business value
This will likely be the first question you ask a business broker so it’s important to understand how he or she has arrived at a figure.
A good business broker will aim to sell your business without dropping the price (too much). A good way of achieving this is to use the RUDE system.
The RUDE system is a business sales planning tool designed to eliminate or offset the negative elements of your business that can potentially stop buyers from proceeding with the sale. It can help you sell your business quicker and for its true value.
Before the GFC, most buyers were willing to overlook the negatives if they were adequately offset by positives. They were willing to take greater risks.
Not anymore. The threshold for acceptable risk had dropped dramatically. The RUDE system separates the barriers to a successful sale into four categories: Risk, Uncertainty, Doubt & Economic Appeal.
“By addressing each aspect of RUDE, you will satisfy buyers’ emotional and financial questions surrounding your business, which will increase your chances of selling it for its true value.”
How to improve the value of your business – RISK assessment
Reducing RISK is any element of your business that carries the chance of a loss of future income or operating headaches for the buyer post-sale. This might include:
- Not enough clients
- One very big client
- One or two very important employees
You need to analyse your business, identify areas of risk, and take action to reduce it.
Eliminating UNCERTAINTY is experienced when a buyer doesn’t know what will happen after they take over the business. For example:
- Limited time remaining on lease
- Business requires in-depth knowledge to manage
As with Risk, you need to identify what elements of your business will make your buyers uncertain and take steps to eliminate them.
Eliminating DOUBT – Buyers have DOUBTS when important facts about your business cannot be verified. For example:
- Unclear reasons for selling
- Unprovable promises
- Incomplete financial documentation
You need to identify all elements that could cause doubt from the buyer’s point of view and take steps to eliminate them.
Increasing ECONOMIC APPEAL is the hardest to adjust, but probably the most powerful. This represents the breadth of the business’s attractiveness to a wide group of buyers. Essentially, the greater the number of buyers who could possibly run your businesses, the more possible buyers there are.
To that end:
- Make the business so there is no need for a buyer to have specialised knowledge to run it. This can be done through providing training or creating operational manuals.
- Put management systems in place, demonstrating enough net income for the business to be run under management while still providing a fair return to a buyer.
- Offer vendor finance or term payments to assist with financing (If more people can afford it, more people can buy it).
The final question to ask is whether there is a market for your business at this time. For example, during COVID-19, it was harder to sell a hospitality business.
What type of profits are buyers looking for?
Whilst predictions can never be 100% accurate, buyers are seeking businesses likely to be future sustainable. That’s what they will pay for – a measure of predictability.
Top the list for most buyers is profit. That means that to them, the price they are willing to pay reflects how much profit they think they will make.
That is one of the main differences between starting a business from scratch and buying an established business. The person who starts a business from scratch knows it will take time to become profitable. The person who buys your established business wants to know how much profit they will make immediately, and in the future, with the least risk.
Comparable Prices and Multipliers: what are they and how do they affect your business value?
Multipliers or Earnings Multipliers are a good way of working out the value of a business. Different multipliers are used for different size businesses. Generally speaking, the smaller or less established the business is, the lower the multiplier.
However, choosing a multiplier is influenced by other factors, too. For example, a business may be small, but it may have diversified and therefore offer multiple income streams. In that case, a higher multiplier would be used.
A business in a niche industry with projected high-growth would warrant a higher multiplier, but a business that is overly dependant on the owner would get a lower multiplier.
Multipliers can dramatically increase or decrease the value of your business – just one more reason why you should always engage an experienced professional business broker.
How to find a business valuation and how much do they cost?
The best way to accurately put a price on your business is to engage a professional registered business valuer – not an accountant or business broker. Choose an independent valuer who you haven’t dealt with before. Valuers will show you comparable businesses and will take the current market into account.
An independent valuer has no hidden agenda and no interest in getting your listing.