The Five Questions That Determine Your Company’s Value
Dave Lavinsky really nailed it in this short article on GrowThink’s blog. It doesn’t matter the type of business you have; all owners should be asking these questions about their businesses if they are contemplating a sale.
The key issue however is this: are you growing your business the right way, and are you focusing on the right things? When it comes time for buyers to appraise the value of your business, they might find different things more important. The last thing you want to do is focus your time developing aspects of your business that buyers don’t like, particularly when doing so forces you to neglect the things they do.
Below are five questions that will determine your business’ value. Answer these questions honestly and then work to improve your position on each.
1. How replicable is your business?
When corporations consider buying a business, they make a “build” or “buy” decision. That is, they ask whether the time and money it would take to build a similar business from scratch is greater than the cost to buy the business from you now.
That goes to say that the more unique and less replicable your business is, the better. So think about how replicable your business is. For example, could another company easily replicate your products and services? Could they easily hire and train a team as good as yours? Would it be simple for them to build a customer base like yours?
Answer these questions honestly and focus on building a profitable and harder-to-replicate business going forward.
2. How easy will it be to run your business after acquisition?
Why do we pay a premium for a new car versus a used one? Because we know the new one doesn’t have any problems. Similarly, acquirers will pay a premium for a business that’s in great “running condition.”
Sure, every business will have its challenges, but a business that is simple to run will be highly valued, like a new car.
If you sold your business today and retired, would the new owner be able to easily run your business?
Do you have systems in place that enable your business to run consistently every day?
Are your employees trained to handle all key issues that arise?
Will your customers continue to buy from your company even though you’re no longer a part of it?
Always think how your business will run after you’re gone, and if it wouldn’t run smoothly, take actions now so that it will.
3. How has your business performed financially?
Unless the majority of your company’s value is in unique and patented technologies, buyers will thoroughly review your financial performance.
Clearly, they want to see strong, growing revenues and profits. If your revenues and profits are on the decline, many buyers will project that decline will continue and significantly decrease the valuation of your business. Fortunately, the opposite is also true, so do whatever you can to have strong and growing revenues and profits.
4. How stable is your customer base?
Your customers are the lifeblood of your business. The revenues you generate from them pay the bills and ideally fund great profits.
As such, acquirers will scrutinize your customer base and its stability. For example, do they expect 50% of your customers to leave after the acquisition? Or 25%? or 10%? Or none?
Clearly, the more stable your customer base, the more attractive you are to an acquirer. In the ideal situation, you have signed contracts with customers so the acquirer has complete certainty they will be retained. If not, your customers have hopefully gotten in the habit of buying your products or services, or have a preference for them so their continued patronage is likely.
Likewise, having a diversified customer base, as opposed to just a few very large clients, helps. With fewer, larger clients, there’s more risk that one will leave and take a large chunk of your revenues with them.
5. What are the odds of sustainable future growth?
When you combine the four questions above, much of what the acquirer is trying to answer is what your odds are for future growth.
For instance, if you have a stable customer base, strong and growing financials, and a unique business that will be easy to run post acquisition, then your odds for future growth are great and you will have tons of suitors.
And tons of suitors interested in buying your business means that they will bid the value up and up so when you sell, you’ll get a great premium. Which is probably one of the reasons you started your business in the first place. So do this, and make it happen!
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