Unfortunately, sellers often ignore one very simple truth: The value of their business increases in direct proportion to the buyers’ decrease in risk. I think this is a very important element of valuation and, as such, should be very well understood by those looking to sell or currently selling their businesses. So, the less risk the more value you may be able to get for your business buyers will compete with price to get at your business. So, let us discuss some of the things that will make your business more valuable and less of a risk to buyers:
1. Increasing Sales. This is an indication that the business continues to grow, and as such is able to increase greater profitability in the future. A business that has “topped out” may be considered risky and less valuable.
2. Increasing Profits.
3. Accurate Financial Statements. The due diligence process is key to most buyers and understanding the financials of the company they intend on buying is highly important. The less cumbersome it is to understand the company’s financials, the less risky it becomes to the buyer and more value it creates.
4. Accurate Tax Returns. Cheating on your taxes may give you an immediate tax benefit, but it will hurt you in terms of getting the right value for your business in the long term.
5. Simple Financial Recasts. When recasting financials, are you going beyond the obvious in add-backs, such as owner’s salary, depreciation, amortization, personal insurance? Since recasts help determine “Owner’s Benefit,” which in turn is use as a multiple to determine value, buyers find less risk in a simple recast.
6. SBA Financing. Does this business qualify for an SBA loan? If it does, there is further confirmation to the buyer that the business has a solid backbone and the ability to pay back debt service on the loan and a provision for the buyer’s life style and earning requirements.
7. Seller Financing. If the seller is willing to provide financing, the buyer trusts in the business ability to generate sufficient cash to pay back the debt and meet his personal financial requirements.
8. Solid Management in place. The less dependent a business is on the owner the better.
Obviously, a business which provides for the aforementioned will get significantly more value and price than those who do not. So, start now. Make sure that your business prepares for and builds on its value by managing your business and applying these practices, accordingly.
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