Selling Your Business? Maximize its Value

One constant in business is that every business owner will eventually exit. When you’re ready to transition your business, the goal is not merely to exit, but to maximize the transaction value of your business.

To that end, we think an important action to pursue as a business owner is to make some form of regular valuation of your business, so you know where you stand and don’t leave money on the table when you sell.

However, we believe it’s important to understand that the validity of this valuation depends on the accuracy of information available at that time. With private businesses, sometimes information may come from questionable sources, such as word of mouth from industry contacts who sold at a particular time. Industries may trade on rule-of-thumb, such as a certain price multiple of revenues or EBITDA profit. Those metrics can be helpful, but given different geographies and market environments, they may also be inaccurate in a given situation.

Why a valuation is important

In general, there are three common reasons to conduct a business valuation. First, knowing their financial stake in a business is valuable for most owners, at least to their personal financial planning. Their company’s value usually has a direct impact on the success of their own family and the ability to meet their financial needs down the road.

Personal financial planning is crucial and it’s valuable to answer the following three questions pertaining to business transition:

1. To whom do you want to sell?
2. When would you like to sell?
3. At what price do you need to sell?

The last question helps drive the valuation discussion. You should know if there’s a “wealth gap” between your current personal assets combined with what your business is worth, and what you need to get from the business sale to meet your (and your family’s) financial goals.

A second reason for business valuation is protection. According to a 2023 survey,¹ it’s estimated that almost 30% of small business owners don't hold any type of business insurance protection. The owner is often the key (or a key) employee, so what happens if they suffer a serious illness or disability, or if they die prematurely? Despite the need to insure key employees, another survey² found that only 22% of small businesses carried key person life insurance for their critical employees. Having adequate insurance coverage is important, but to attain it you must first know the actual value of what you’re trying to insure.

A third reason for a valuation is knowing how the business compares to its peers. In private markets, especially during volatile times, when considering an exit you want your business to be the most attractive one to potential buyers. Doing that and knowing how you compare with competitors will require valuation work.

Driving value higher

There are tools available that can help you evaluate your business and increase its value over time. For instance, consider doing a fairly comprehensive valuation at least annually, since value may change often and could impact your personal financial planning efforts. When you work with business valuation experts, they can help you track valuations over time and can advise you on the particular value drivers of your business that might be improved in order to raise the valuation.

As part of the assessment and valuation process, here’s a handy checklist from Forbes.com³ that runs through a series of six factors related to boosting business value. If your business can show strength in these key areas, chances are that you will command a more favorable sale price. Factors to consider include the following:

1. Having a diversified customer base helps reduce concentration risk and opens avenues for growth
2. Sustainable recurring revenue promotes stability and helps ensure future viability
3. Good, improving cash flow signals business growth and an ability to cover expenses
4. Proven scalability reflects good efficiency and helps increase profit margins as business expands
5. Competitive advantages will help retain existing customers and attract new ones
6. Financial foresight and controls provide transparency and help forecast future financial demands

What type of valuation do you need?

A formal business valuation can be accurate, but also expensive and time-consuming. It involves income-based approaches like discounted cash flow, or a market approach using metrics like comparable sales.

If you’re in an imminent sale situation, then you’ll want a formal valuation because the buyer likely needs that. As an annual assessment, however, robust software programs exist that can arrive at a valuation using data from millions of real-time transactions in specific geographies and industries.

Certain programs will allow you to create a highly detailed report that uses metrics like asset, enterprise and liquidation value to calculate business valuations, as well as a range of specific KPIs tracked over time so you can review business performance on an absolute basis and relative to industry benchmarks. Even though you’re busy with day-to-day business operations, strategic planning and conducting a periodic valuation assessment are important activities, especially when an owner is thinking of selling. If you drive your business valuation consistently higher, you may attain a more attractive sale price when the time comes.

¹ https://www.nextinsurance.com/blog/survey-small-businesses-lack-confidence-adequate-insurance/
² https://millsinsurancebrokers.ca/key-person-life-insurance-what-small-business-owners-need-to-know
³ https://www.forbes.com/sites/johnbrown/2016/07/27/six-ways-to-increase-the-value-of-your-business/?sh=4c16bc8e2d95

ABOUT THE AUTHOR