How do you add value when selling your business?

If you’re looking to sell a business, it’s crucial to assess its value. But a typical business has two values. The “academic” value is the one determined by a professional business valuation. The other is the “true market” value.

The academic value is determined using a formula that takes into account the hard assets of the business. The hard assets include cash flow, industry averages, and multiples. The fair market value also considers those items, but then considers what buyers are willing to pay.

For many small and mid-sized businesses, hard assets like equipment, vehicles, land, buildings, and inventory may be limited. For some small businesses, there may be no hard assets at all. Instead, their value is based on intangibles like employees, business processes, customer lists, location, and business relationships.

Maximize the value of your business.

To maximize the fair market value of your business, you must capitalize on those intangible assets.

• Develop key employees. Buyers generally aren’t interested in paying a premium if the business relies on you for its success. Remember to delegate responsibility to key employees and involve your key staff members in the decision-making process. Demonstrating that your company’s success is reliant on your capable, well-trained employees, not just you, will pay off at the time of sale.
• Document what you do. Ensure that job descriptions, operational processes, and strategic plans are well-documented. Documented records and plans provide buyers with greater confidence that they can replicate your successful growth and will facilitate their financing. Also, be sure to keep business records, such as sales and expense reports, internal profit and loss statements/balance sheets, and tax returns, clean and well-organized.
• Build relationships. Name recognition, customer awareness, and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships are key. Consider diversifying both supplier and customer accounts.
• Improve cash flows. A potential buyer wants to see the “true cash flow.” And, of course, in the business world, cash is king. Ensure that all income is driven to the bottom line.
• Review your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
• Find and build your niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to entry by competitors.
• Remodel, clean, and organize. What’s the first thing anyone does when they put their home on the market? They keep things tidy and ensure everything is in its proper place. Yet, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.

Intangibles and selling a business

Keep these important intangible assets in mind when considering the sale of your business. They convey a value that financial statements alone do not. If you’re looking to sell, create a plan. Start working on the intangibles well in advance of putting your business up for sale. It’s essential to maintain your focus until the sale is complete.

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary, to name a few. Remember, you only have one chance to sell your business, so you want to do it right.

If you have a question about selling or valuing your business, please call Andrew toll-free at (844) 414-9700.

This article is reprinted as a courtesy of the International Business Brokers Association^® (IBBA). IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of business brokerage and mergers and acquisitions. IBBA has 1,950 members worldwide, with its corporate headquarters located in Chicago, Illinois.