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

Comments & Replies: 2 Views: 8611 Posted By: Peter Siegel MBA

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.

Topics: Business Valuation, Selling A Business Tags: business valuation, for sale by owner, selling a business

Contributor: Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

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.

Helpful Resources To Assist In Selling And Buying California Businesses

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Related Articles, Events, Blog Posts, Discussions, Videos, Interviews

Buyer Beware: Does A Company's Culture Effect The Sale Of A Small Business?

When purchasing a small to mid-szied CA business, there are a many items to evaluate. One area that is often overlooked is the business's office culture. Peter Siegel, MBA with BizBen discusses with business buyers the importance of understanding how the business "feels" on a day-to-day basis.

Uncover Hidden Problems In Due Diligence When You Buy A Small Business

Most everyone who's decided to buy a small business in California knows the importance of due diligence. That involves close examination of a business prior to removing contingencies. But not everyone knows how to uncover problems that are not obvious. Here are five of the most common hidden issues.

Valuing A Business - Do You Add The Inventory Amount To The Price Or Not?

A business buyer asks how to handle the inventory amount in the purchase price of a business. Do you add the inventory value to the business value? Peter Siegel, MBA (ProBuy & ProSell Program Advisor - Lead Facilitator ) answers this question with the BizBen Network of advisors and resources.

Who Really Represents The Business Buyer In A Deal? Does Dual Agency Work?

Who really represents the buyer? The selling broker or agent through dual agency? Many brokers and agents weigh in on this Discussion on BizBen. Bottom line is all business buyers need to know who really represents them and has their best interest at heart when seeking and negotiating on deals.

What Is The Typical Business Broker Fee For Sellers And Buyers? Who Pays It?

Was just asked the question from a business owner what the "typical commission" amount is for a broker or agent and if upfront fees are common? Thought this might be a great Discussion topic on BizBen for both business owner/sellers and potentially for business buyers (buyer representation).

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

There are a lot of misconceptions about what enhances the value of a business. The following factors in this Discussion Post on BizBen are aspects of a business that really drives its value and pricing. Business owners thinking of selling should check these out these factors before selling.

How To Determine Whether The Buyer For Your Business For Sale Is Sincere

A problem owners encounter when offering a CA business for sale is that not all so-called business buyers are qualified to make the purchase. It's frustrating and costly to waste time showing non-qualified buyers the business. Here are ways to identify time wasters so the focus is on real buyers.

Before Buying A California Business, 10 Questions You Should Ask Yourself

Before buying a business, all serious business buyers should ask themselves some key questions about possible buying a small California business, franchise, or opportunity - from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 925-785-3118.