Many business owners never think about the value of their company–until they’re trying to sell it. Obtaining a business valuation is the first step if you intend to sell your company. According to Pam Oliver, owner of Horizon Business Valuations LLC, business valuation is a complex process that touches every aspect of a company.
Besides positioning a company for sale, here are some of the reasons you may need to undergo a business valuation for your company:
- Tax compliance.
- Financial reporting.
- Litigation (e.g., valuing a family business in order to divide. it up in a divorce situations.)
- Partnership dissolution (when partners decide to go separate ways and one partner must buy the other partner out.)
- Establishing a buy-sell agreement at the start of a business to protect partners’ interests if a triggering event occurs, by setting the parameters for buyout ahead of time. Examples of triggering events include such as death, bankruptcy, termination, etc. (This is something few people do when starting a business, but a step Pam highly recommends.)
Pam strongly urges business owners to start the process before they’re thinking of selling. “If people came in with a plan to sell a business within 3-5 years, we could not only let them know a fair price, we could direct them on ways to increase the value of the business prior to selling. Transforming your business from a successful business to a saleable business takes time.”
The value of a business is driven by several factors, including:
- Concentration of customer base: if you have all your eggs in one basket (e.g., a large customer who makes up most of your sales) then your business is a more risky prospect. This is because losing one customer could take the business down.
- Buyer prospects: a competitor in your industry may pay a higher price for your business, due to synergies.
- Market forces: when a product or business is riding a trend, it’s valuable, but once the trend goes, the business goes with it. (Think “Beanie Babies.”)
There are many ways to make your business a more attractive prospect for sale, but they all boil down to one thing: transferability. “If a business’ future success is tied to one individual (like the owner) then it becomes difficult to transfer and thus, less valuable on the market,” explains Pam. In other words, your business can’t just be all about you. Especially if you want it to be valuable enough to sell.
If you want the best possible price for your company, have your business valued sooner, rather than later. (And don’t forget to contact Ten Key, Inc. If your future plans include selling a business, we can help with advice, guidance, and resources!)