Have you ever wondered what your business is worth? If you’re like many small business owners, your business isn’t just another asset; it’s likely your biggest one and probably a significant part of your retirement plan. So, what makes some businesses fetch a high price while others barely make a sale?
Curiosity About Business Value
It’s only natural to want to know the value of what you’ve built. For every business that sells for a handsome sum, countless others barely make it to the market. So, what sets them apart?
What Are You Selling?
When the time comes to sell, you need to know exactly what’s on offer. This usually includes fixtures and fittings, plant and equipment, stock on hand, and your business’s goodwill. However, buyers prefer not to take over your liabilities or outstanding debts. Most sales end up being transactions of business assets.
Valuing Your Assets
While putting a price tag on physical assets like plant and equipment or stock is straightforward, valuing goodwill is trickier. Goodwill encompasses all those intangible assets that are challenging to quantify. Though it’s clear these assets hold value, the real question is: how much? Essentially, goodwill represents the future free cash flow your business can generate, which is what buyers are willing to pay for.
Goodwill and Future Cashflow
If your business promises reasonable certainty of future profits and cash flow, that’s valuable. However, a start-up may carry more risks and uncertainties, operating at a loss for years before becoming profitable. The price of goodwill is what someone is willing to pay to sidestep these risks and the time it takes to establish the business.
What Drives Business Value?
So, what are people willing to pay for? The list includes:
- A track record of solid profits
- Returns on capital invested (aiming for over 30%)
- Strong growth and future prospects
- Recognisable brand value
- Independence from the business owner
- A robust, verifiable customer base
- Exclusive territories providing monopoly income
- Sustainable competitive advantages
- Efficient systems and procedures
Unique businesses and opportunities can command extraordinary prices, often far from the average. Building something distinct could fetch a price beyond typical expectations. However, ultimately, it’s the market that determines the value.
Planning Your Exit Strategy
Even if selling isn’t on your mind right now, it’s inevitable. Understanding who might be interested in buying your business is crucial. Someone out there might be willing to pay a premium for your business if it significantly enhances their growth strategy or adds exceptional value.
Building your business with an eventual sale in mind means focusing on strategies that enhance its value year after year. After all, it’s about ensuring that when the time comes, your business is as valuable as possible.
If you’re considering selling your business in the near future, it’s essential to understand its value and what makes it attractive to potential buyers. At C&N Accountants, we specialise in business valuations and helping owners plan exit strategies. Our team of experts can provide a detailed assessment of your business’s value and help you identify areas where you can enhance its worth. Contact us today to schedule a consultation and take the first step towards maximising your business’s value.