There are many reasons why a business may realize less than its desired sales price… The most basic is that a buyer doesn’t assign the same value to the business as the seller. Selling your business independently is a mistake!
Let’s look at some common company characteristics that cause buyers to downgrade value— and ways to address them before you start the sales process.
Is taking insurance when selling your business in California considered a good practice?
1. You own a disproportionately dependent business.
Like having all your eggs in one basket, your company shouldn’t be significantly dependent on any one customer, employee, or vendor.
The consequences of this scenario are a potential drop in revenue if a key employee unexpectedly quits, your leading supplier goes out of business, or a customer leaves you for a competitor.
Experts, such as Sacramento-based business advisor Andrew Rogerson, advise that no more than 10-15% of revenue should be derived from any one person or source.
2. No growth strategy.
Buyers are interested in businesses that can show a foreseeable path for growth.
As a business seller, you must be proactive in identifying growth opportunities and communicating to the new owner how to capitalize on them.
Back up your growth strategies and demonstrate how the company can execute them effectively.
This might include a list of potential acquisitions or provide your thoughts on new geographic markets or customer segmentation.
Demonstrate that your resources are secure to support increased demand if the new owner elects to adopt your growth strategies.
3. Your company has little to no cash flow.
Simply put, the more cash you generate above and beyond your working capital requirements, the more your company will be worth.
If a buyer has to invest considerable working capital into your company, they’ll be less inclined to pay you top dollar for the company.
Two methods of increasing cash flow are (i) accelerating accounts receivable and (ii) extending accounts payable. To accelerate accounts receivable, you can motivate customers to pay early by offering discounts and accepting as many forms of payment as possible, thereby providing greater flexibility to your customers.
You may be able to extend accounts payable by negotiating terms that allow for payment deadlines to be extended to suppliers or vendors, or by opting to pay regular installments rather than annual fees, thereby keeping more cash on hand.
One more reason why selling your business on your own is a mistake – Andrew Rogerson can help you adjust your cash flow.
4. No recurring revenue.
Tech companies can receive high multiples, especially those with subscription-based revenue models.
Buyers will pay a premium for the ability to secure predictable future revenue.
A subscription (recurring revenue model) is a widely accepted strategy for companies with repeat customers and products or services that are consumed over time, such as media and software.
5. You’re in a commoditized business.
Buyers are attracted to businesses that are differentiated, and companies should focus on creating barriers that prevent competitors and new entrants from capturing their share of the market.
If you are a highly commoditized business, you must compete on price: the less pricing authority you have, the less money you can make.
And if you are making less money, you have less to invest in growing the business.
Research shows that companies that work on creating this level of authority in their market can increase their multiple by a complete turn over the average small to mid-sized business.
6. Your business can’t succeed without you.
This is the final of six reasons why selling your business independently is a mistake. When you leave your company, the buyer will focus their energies on your team’s talents and competencies.
Contact a Business Sales Specialist
Selling your business independently is a mistake. Don’t downgrade the value of your business. Work with an experienced advisor to address these issues with your company before you sell.
Andrew Rogerson specializes in helping business owners value and sell their businesses. If you want a free 127-point Business Transition Checklist and to sign up for Andrew’s free newsletter, open the link and enter your email address.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew services the whole state of California.