It is inevitable that at some point in any small business owner’s life they will ask themselves the question “what is my business worth?” The answer is far from simple. As self-employed baby-boomers begin to plan their retirements and the ultimate succession of their wealth to the next generation they often wonder what their small businesses can be sold for in the open market; or if their businesses can even be sold at all. The reality is that there are a multitude of factors that come into play when valuing and selling a small business, however there are certain characteristics that can increase the value of your business and others that can decrease the value.
Private businesses with positive earnings are typically valued using a multiple of their maintainable cash flow. This would indicate that a business with a higher maintainable cash flow will fetch a higher price from a buyer. The top three desirable characteristics in a private business are:
- Ensuring the continuity of the business post-transaction through the retention of key customer and supplier accounts
- A strong management team in place to support the transition of ownership
- A strong and healthy balance sheet
One major characteristic that causes a business to have a lower value in comparison with other similar small businesses is the degree of owner involvement in the day to day operations. If all of the key skills and relationships reside solely with the owner, a purchaser will assign a lower value as the company will lose access to these skills and relationships once the owner exits.
In order to sell your business the purchaser must have some guarantee that the business will continue to be as profitable as it was in the past. If the skills and connections of the old owner-manager are the lifeblood of the business then transitioning the business to a new owner may be extremely difficult if not impossible. This is why it may be easier to sell a gas station than a small law firm. The gas station is a turn-key operation, no one goes to a gas station because they like or trust the owner. Contrast that with a small law firm, there is no guarantee that the old lawyer’s clients will continue to do business with the new lawyer once the old lawyer has left.
Selling your small business can be a long and difficult endeavor. Most successful sales are pre-planned far in advance and allow for a smooth transition of ownership. Unlike purchasing and selling a stock in the financial markets the purchase, sale, and eventual transition of a private business to a new owner should be carefully planned and executed using an experienced team of competent advisors.
At Campanella McDonald LLP we have helped numerous small business owners price their businesses with the use of our Chartered Business Valuator and financial advisory department. Feel free to contact us for more information.