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Thinking Of Selling My Business: What Factors Creates Value And Drive Price?



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   There are a lot of misconceptions about what enhances the value of a business. The following factors in this Discussion are aspects of a business that really drives its value and pricing. A business owner asked me this question today so I wanted to get others view points as well in this Discussion.

There are a lot of misconceptions about what enhances the value of a business. The following are aspects of a business that really drive its value.

Value Drivers Are:

1. History And Longevity

Being in business for a long time isn t necessarily a guarantee of a successful business, but it s a good indicator. Having a compelling history behind your business doesn t hurt its value either.

2. Historical Profitability

This one is a no brainer. Being in business for a long time and being profitable is a great combination. Historical profitability gives the buyer confidence in future profitability.

3. Good Books And Records That Are Defendable

We just talked about historical profitability. In order to prove you have been profitable you need to keep good books and financial records that can be verified.

4. Reputation

A good reputation is worth its weight in gold. It's an element of the goodwill your business has developed over time and it adds value to it. A good reputation means people know your business and have a positive view of it. That means they are more likely to be repeat customers and recommend your business to friends and family. That could reduce the amount a new owner will need to spend on advertising and marketing and again gives them confidence they are buying a business that will give them a good return on their investment.

5. Location And Accessibility

Is your business ideally located and easily accessible? If not, it could be effecting your bottom line as potential customers decide to go elsewhere and that could affect your businesses value.

6. Staff Tenure

Having a staff both with experience and tenure that is willing to stay on after transition of ownership is priceless. This saves the new owner time and money finding and training new employees.

7. Market Desirability

Is your product or service desired by the public? The more it is the more value your business has.

8. Potential Future Earnings And Growth Opportunities

How much potential does your business have for future growth? The more potential the more value it has to potential buyers.

Contributor: Transactional Attorney
In addition to Peter's excellent points, I've found that there is another value driver that most Sellers either overlook or purposely ignore, which is how easily the "things" that generate the business' value can be transferred to a new owner.

For example, I was working with a buyer on the acquisition of a business which had a number of long-term contracts where the business supplied finished goods to specific customers. On the surface it looked like a great deal, with long-term, stable income guaranteed by contracts with large companies.

But when we dug deeper into the fine print, most of those contracts had provisions that either required written approval of a transfer of the agreement or prevented them from being transferred entirely. While the Seller suggested that the Buyer could just continue to operate under the same trade name and not raise any red flags with the customers, the agreements made it clear that that any change of ownership would be considered a transfer of the contract that would require approval.

The deal ended up falling apart because we couldn't get comfortable that the contracts would be transferable and the Seller refused to allow us to make that a contingency to the close of the sale.

What could the Seller have done differently? First, they could have proactively talked with their customers about transferring the contracts properly and helped the Buyer get a comfort level that there wouldn't be any issues. Second, they could have agreed to make the deal contingent on the contracts being assignable to the buyer.

The bottom line is that even if a business checks off all of the other value points, if that value can't legally be transferred to a buyer (or if there's some risk involved in a transfer) then you're going to have trouble getting maximum value as a Seller. Taking the steps to address those issues ahead of time can help increase a business' value and make it less likely that a buyer will pull out after doing their legal due diligence.

In addition to Peter's excellent points, I've found that there is another value driver that most Sellers either overlook or purposely ignore, which is how easily the "things" that generate the business' value can be transferred to a new owner.

For example, I was working with a buyer on the acquisition of a business which had a number of long-term contracts where the business supplied finished goods to specific customers. On the surface it looked like a great deal, with long-term, stable income guaranteed by contracts with large companies.

But when we dug deeper into the fine print, most of those contracts had provisions that either required written approval of a transfer of the agreement or prevented them from being transferred entirely. While the Seller suggested that the Buyer could just continue to operate under the same trade name and not raise any red flags with the customers, the agreements made it clear that that any change of ownership would be considered a transfer of the contract that would require approval.

The deal ended up falling apart because we couldn't get comfortable that the contracts would be transferable and the Seller refused to allow us to make that a contingency to the close of the sale.

What could the Seller have done differently? First, they could have proactively talked with their customers about transferring the contracts properly and helped the Buyer get a comfort level that there wouldn't be any issues. Second, they could have agreed to make the deal contingent on the contracts being assignable to the buyer.

The bottom line is that even if a business checks off all of the other value points, if that value can't legally be transferred to a buyer (or if there's some risk involved in a transfer) then you're going to have trouble getting maximum value as a Seller. Taking the steps to address those issues ahead of time can help increase a business' value and make it less likely that a buyer will pull out after doing their legal due diligence.

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