Listing Growth Opportunities
When you sell your company, you want to make sure you understand sell business potential, it is important to be specific on what opportunities exist and what it would take to achieve them. The next question that a business buyer will ask is "If it is so easy to pursue these opportunities, why haven't you done it?" As long as there is a convincing reason for the buyer to understand, a buyer will put weight into what you have presented. Some of these reasons may include lack of capital, burn out, or you don't want to add the burden of managing additional employees. Think of what you would do to expand your company if you had additional money to grow the business.
This is not the time to be vague. The more detail, the better, such as timelines of implementation, costs, and return on investment. Other details to consider include the employee requirements, working capital needs, affects on inventory, equipment, training, etc. These ideas should also include potential obstacles or difficulties in implementing the strategy. To sell business growth opportunities, there needs to be substance to the ideas..
As a business seller, why not add some additional well thought out ideas to get the buyer even more excited to help sell your company?
Understanding the Value of Your Assets
A question that often comes up from owners is: "When selling my business does the business value include the equipment and inventory?" The short answer is yes. Without equipment or inventory, the business cannot generate sales thus there would not be any cash flow, therefore there would not be any value of the business as a going concern. Business buyers pay at a multiple of cash flow which is really the inverse of their return on investment. If the buyer needs a 33% return on his investment then that means the business needs to pay for itself in 3 years. Looking at it from the other perspective, it means that the buyer is willing to pay 3 times earnings. That is a simplistic way of looking at it, but is the basic idea. This means that the business assets are part of the value since a buyer is looking at how much they are going to have to pay for everything to make the amount of money that the business generates. So if you are selling your business that is very asset heavy it doesn't mean that you take the value of the business and add on the assets. If that was the case, the math just would not work from a buyer's perspective to receive the return on investment that they need. Whether the business has a lot of assets or minimal assets, cash flow is king. A business will sell based off a multiple of its cash flow.
Assets do have a meaningful place in value. The real value is in the ease of replication of the business. For example, if I had a service based business that had no assets and generated $250,000 in cash flow and a manufacturing business that had a bunch of machinery to produce a widget and it also produced $250,000 in cash flow, the manufacturing company would probably have a higher value than the service company. The reason would be that the ease of replication. It would be easier to replicate the service business since you would not have the large capital investment of the machinery. In theory it would be easier to have a competitor step in and take away market share. This would result in a lower multiple in the valuation. It would be a lot more difficult for someone to enter the same market for the manufacturing company thus it would receive a higher multiple. This is also a simplistic example to illustrate the rational and there are always the exceptions to the rules in which you find a service based business that can't be easily replicated and vice versa. Business valuation involves looking at many aspects of the business. At the end of the day, the math has to work in that the buyer needs to be able to service the debt payments on the financing of the purchase, pay themselves a salary, and make a reasonable return on their investment after these expenses. When selling your business, don't fall into the trap of pricing by valuing the business and then adding on the assets such as equipment and inventory.