As an entrepreneur, your business has a value. When you are ready to retire from your business, you do not have to close your doors and just walk away. Your business is an asset that can be sold. The value of a business is all about timing. Value goes up and down depending on what is going on in the external environment. Knowing what events affects your revenue is crucial. For example an internet business revenue may be closely tied to googles algorithm.
Business cycle
Every business has a growth, mature and decline phase. As a business owner, you want to sell before your business hits the decline phase. In other words, the best time to sell is when things are still good. A strategic buyer will have abilities to take the business to the next level which you may not have. However, if you choose to hold to your business for too long and the profits begin to decline no one will want to buy your business. Waiting too long before you sell may make your business unsellable.
Valuation myths
Due to industry rule of thumbs around multiples of revenue, business owner accidentally think that if they make more money, their business will be worth more. As a result, they deploy tactics to increase sales just before selling. This can actually work against you. Rather than manipulate sales, it is advisable to work with a consultant couple of years before you sell. A consultant can help you structure your business in way to maximize the value of your business. Increased revenue does not automatically mean increased value. Buyers also look at intangible to see what the business is really worth. Intangibles make up approximately 50 percent of a company’s value. Some intangibles to consider are:
- Customer lists
- Leases
- Patents and copyrights
- Long term contracts
- Licenses
- An assembled workforce
- A significant market share
- Recognizable logo
- Good reputation
- Strong vendor relationships
- Processes that are hard to duplicate
- Credit worthiness
- Systemized processes that don’t depend on the owner
Every year you choose to hold on to your business without planning exit is a risk. Your business value is highly dependent on what is going on in your industry and economy at the time of your sale. The good times are the best time to start thinking of selling.