Before you can put a price on something, you should have a good understanding of what a reasonable buyer might be willing to purchase it for. This might seem like the kind of platitude you might come across during the first week of an Economics 101 class, but when it comes to selling companies this rule is frequently — and more often than not— ignored by small business owners who only have the vaguest understanding of business valuation and the real market value of their enterprise.
This mistake generally arises from the conflation of two related but distinct terms: price and value. While price is a concrete number, value is significantly more mutable and subjective, and getting a good price means understanding who your company is valuable to and why.
To Understand Value, Understand the Market
A business owner may look at their company and see its value in terms of the number of employees, overall revenue, and brand penetration. But a potential buyer might see high overhead, low ROI, and a brand too well-established to be easily refreshed. Understanding the value of your company means understanding the appeal it would have for a prospective buyer.
For example, a buyer looking to expand into your market may place a high value on your physical assets and workforce insofar as they offer a ready-made channel for delivering new products or services to your region, while a competitor might see value in consolidating their market share by merging your business with their own.
Being able to identify the strengths and weaknesses of different aspects of your business and translate those strengths and weaknesses into a price is the first step toward finding the right buyer.
Translating Value into a Number
The value of a business doesn’t simply lie in its concrete assets (in fact, some assets, such as property, can turn out to be liabilities that you need to liquidate before selling), but in the way these assets can be leveraged for future profit.
This is why it is important to have get your business valuated properly by experts who understand your industry and can put a number on intangibles like customer trust, branding, infrastructure, and workforce experience.
Having a professional business valuation will give you the confidence to start marketing your business to potential buyers, safe in the knowledge that the price you are asking for is fair, reasonable, and accurate to the current value of your company, and will put you in a stronger negotiating position when the time comes to close the sale.
While there are a range of different firms that offer valuation services, many small business owners choose to work with business brokers who offer a full-service approach to business sales, helping with everything from the valuation to marketing, due diligence, and final negotiations.
Even if you aren’t yet sure whether you want to sell your company, business valuation can serve a range of different purposes, and can help you determine which areas of your company you should invest in if you want to make it more appealing to future buyers.
Remember, if you start exploring your business valuation options today, you’ll be better prepared for any sudden opportunities that may arise in the year to come.