If you are a typical business owner, whether you plan for it to happen in the next year or 20 years from now, at some point you are going to either sell, transition, or simply shut down your business.  If you plan to sell or transition your business one day, you should understand how the Business Valuation Scale works.

There are two checks…

When the day comes to sell your business, most business owners have one check in mind, the check that will be written by the buyer for all the blood, sweat, tears and equity that you have put into the business. Your expectations are high. You have worked hard and you expect to be rewarded for all that you have done.  It is time to pass the torch and that check is your reward for a job well done.

For the buyer it is different.   They not only see the dollar amount you are asking for the business, they have to be prepared to keep the business you have built running well.  They look at the infusion of capital that will be required.  Payroll for the employees, operating equipment, inventory, property/rent, insurance, and the utilities will require capital.  At the end of the month, how much money does your business require to keep operating? Often the business needs cash to continue operations.

The buyer’s view is there are two checks.   The first is the one they write to the seller, and the second is the one they write to fund the operation of the business going forward.

Playing on the Valuation Scale…

Let’s place these buyer’s two checks on each end the Business Valuation Scale. On one end is the check for you, the business seller.  On the other end is the check to fund the operation of the business. Each check weighs down the Scale in relation to its dollar amount.   If the buyer has limited funds (which is often the case), it is easy to see what happens when more capital is required to fund the operation of the business. The money has to come from somewhere.  The check for the seller decreases and the Business Valuation Scale tilts away from the seller’s favor.   The buyer might even value your business higher, but because they have limited resources available they are unable to.

Tilting the Scale in your favor…

The best way to ensure the Business Valuation Scale tilts in your favor is to reduce the outflow of cash that doesn’t have revenue coming in to offset it.   Start with a review of your gross profit margins and try to shorten your billing cycles to minimize the money the buyer needs for operations.   If your business has inventory; are the levels in-line with sales or are there items that stay on the shelf that you can move before the sale?

A buyer is going to place more value on a business requiring less capital infusion at the time of purchase. Why? Because it is an indicator that the business self-funds a large percentage of its overhead with well managed inventory levels, margins, and billing practices.    When more value is placed on the business, the Business Valuation Scale tilts in favor of the business owner.

How would your business tilt on the Business Valuation Scale?  If you’d like to discuss in more detail, call for an appointment 931-456-4910. I look forward to helping your business sale scale be tilted in your favor!