If you’ve decided to sell your business, one of the most critical aspects of the sale is getting the right price for you.
Selling your business takes a lot of organisation and planning. Staying on top of the process is critical for a good sale. Whilst there’s more to a business exit than the sale price, it would be ignorant to pretend this isn’t a critical factor.
“How much should I sell my business for?” is a frequent question, and there is ONE answer that fits all. This answer is: “When it’s worth what you need it to be worth it to move onto the next stage of your life.”
So your next question should be: “How much is enough for me?”. Once this figure is known, then there are ways you can estimate the market value of your company. With this, you can ensure that this value will meet your needs.
So, whether you’re ready to sell or considering an exit, the Uscita team has the experience to deliver the right exit at the right time when selling your company. A business sale can be frustrating, but working with professional business brokers makes the process less stressful and will provide confidence that you get a fair price for your business.
In this article, we will discuss the value of your business and the routes you can take to get the sale price you want. Of course, every business is different. Yet, the path to a satisfying exit is often the same. We’ve broken down these steps to help you understand the price you should get for your business.
We specialise in selling engineering, manufacturing and professional services businesses. Our tips will be valid for most businesses but with a special relevance for these sectors, as we know them the most.
Keep reading to find out the factors determining how much you should sell your business for.
How to know if my business sale price is fair?
In any deal, we all want to achieve a good result. If this is your first business sale, it might be challenging to know when you’re looking at a fair price. There are some methods you can take to ensure your business sells for a reasonable amount, and one of the most important is to value your business before selling.
An accurate valuation is more likely to lead to a successful sale and business exit. This initial step will give you the specific knowledge needed for a satisfying sale. You’ll be better prepared to strike a deal and negotiations when you have real figures.
It’s important to note that the final price of your sale and the value of your business will depend on your industry. Some internet guides hint at sale prices, which often depend on the business’s size, so it’s best to get personalised advice. These are often quoted as industry averages, and they are just that – average and therefore aren’t always accurate. Remember to consider alongside your industry, the potential for more growth, cash flow, recurring revenue and the management team you will leave in place after your sale. This is where a broker with experience in your industry can make valuation quicker and more accurate.
A pre-sale valuation will provide a guide and allow you to understand a fair sale price, plus it’ll give you the data to achieve it.
Why is a business valuation important?
A business valuation gives you information about your business from an unbiased perspective. This knowledge is crucial to a fair price in a business sale.
The valuation process should also help you understand the attraction your business has to various buyers and how each of them will view its value. Understanding the different types of buyers and motivations will certainly help when it comes to negotiations, whether they are investors, trade buyers, private equity or family offices.
What determines the value of my business?
The value of a business is dependent on many factors.
If you’re formulating your business’ price, it can be helpful to use these factors to inform your pricing. Take time to review each aspect. You may be able to make pre-sale improvements that result in a higher sale price.
- Tangible Assets. These include any machinery, specialised equipment, or property owned by the business. Ask yourself, what expansion capacity is there? Is it well maintained?
- Intangible Assets. Have you protected your brand or registered any patents? They could also include important general documentation (e.g. domain name certificates) and well-organised accounts information.
- Revenue. Your company’s annual growth is a significant defining factor in the market value. Long term growth will tend to attract higher offers if you can show how it was achieved.
- Employees. Your staff are also an important aspect of the business’ value. Having a well-motivated team capable of running the business in the owner’s absence adds value.
- Expansion. Another key element is the growth potential. What new products or geographic expansion is possible for a new owner. This is one of the most desirable factors for buyers.
Another element affecting your business value is a solid future business plan. Companies that offer a well-thought-out future plan are much more attractive. If you haven’t already, consider putting together a comprehensive forecast. This will increase your business value and sale price too.
How to value my business?
Before starting your valuation process, ensure your documents are present and organised. It’s essential that your accounts are in order and up to date. These are key points in most valuations.
You can also take more than one approach or method to value a business. Each helps you determine your business value, but they take different factors into account. Here is the summary of the concepts mentioned in the linked post:
Approaches
There are four different approaches business owners can choose from. These approaches include the income, market, asset-based, and cultural approaches. Your business broker will advise you on which approach suits your needs best.
Methods
The method you should take depends on your unique factors – for example, the size of the business. Again, if you choose to work with a broker or an expert, they will likely advise the best method for you.
Standard business valuation methods include:
- Entry cost – This method evaluates how much a buyer would spend to create a similar business. This informs you how much your company is worth.
- Rule of thumb valuation – Also known as turnover valuation, this is a more informal method. This process focuses more on your sales revenue. Companies that use this method often have similar gross margins and costs.
- EBITA (Earnings before interest, tax, depreciation and amortisation) – A simple way of estimating future cash flows and then applying a multiple to arrive at a value. The multiple chosen will be affected by industry and 8 other key metrics.
- P/E (Price-to-earnings ratio) – The P/E method focuses on business profits (post-tax). From this data, brokers can estimate a company’s worth, but it is mainly used by quoted companies.
Your method and approach will depend on your business sector, size, and revenue. If you’re unsure about your business, consider working with a professional. A business broker can guide you through the process without hassle or confusion.
Should you work with a business broker?
If you’re gearing up for sale, a business broker will help you achieve a reliable valuation. Brokers can give you unbiased advice and guidance. This is handy for any owner who wants a second pair of eyes on the selling process. Also, business brokers can advise you on ways to grow your business value before you sell. This can leave you with extra money for retirement, travelling, or whatever you want!
It’s always good to work with an experienced professional if you’re unsure about the process. Some brokers, like Uscita, offer no-obligation quotes and free valuations. This can help owners decide if the service is right for them before committing to it.
We understand that some business owners want to navigate the process alone. But, if you want a helping hand, we’re always here to assist.
Interested in working with a trusted business broker? Start with a valuation.
Should I increase the sale price of my business?
It’s common to want the best price possible in a business sale. Sometimes owners can increase the price of their sale with simple actions.
After a valuation, some business owners want to increase their current market value. If there’s potential for more growth pre-sale, you can postpone your business exit. Owners that choose this route usually take six months to a few years to invest in their business. This extra work raises the sale price and the desirability of the company.
The key components needed include a strong plan and a reliable business model. Buyers are looking for a low-risk business with the potential for increased revenue. The more a business owner can demonstrate, the more attractive their company will be. Buyers will always pay more for a business with a bright future built on solid current foundations.
Time is an important factor in increasing the business sale price. If you’re looking for a quick exit due to push factors (e.g. health issues, change in life circumstances), postponing the sale won’t be a viable option. But, if you have the luxury of time, your broker may advise you to grow the business for a higher sale price. Owners planning a long-term exit can also choose to boost their business pre-sale.
The majority of business owners that stay and work on their business are leaving due to pull factors. Many are planning an exit to retire or travel, so their pull factors are less time-sensitive. If your future plans can wait for some time, you can focus on extra business growth.
The key starting point here is to understand – “How much is enough for me” and then decide if you can sell now or you need to grow the value.
What you can do to increase your business’ value before a sale
If you want to increase your market value pre-sale, there are some actions you can consider.
The first tip many brokers give to clients is to consider scaling their business. A scalable business model allows the company to grow without issues. This is a very attractive quality. Potential buyers often pay more if the business is scalable. Scalability comes down to six factors. These include recruitment (customers and employees), partnering with other companies, technology, outsourcing, marketing, and innovation. Consider these areas before you sell.
As already mentioned, another way you can increase your value is through a well-thought-out marketing plan. Business plans work as a guide for the future. These documents should be comprehensive and extensive, considering all possible scenarios. When you map out the company’s future, potential buyers will be able to calculate the risk of buying. A plan will help them take over the business, leaving you with a smoother and quicker exit.
Risk is the most crucial element of buying a business. Potential buyers will rarely look for high-risk investments. Instead, they want to acquire a company that they can grow – without any surprises! Make sure you’re proactive and take the time to examine and reduce your risk profile (e.g. key staff, customers or suppliers).
Many business owners need to organise their accounts before the sale process. Again, potential buyers look for a business that they will be able to take over with ease. If your company has its documents ready, the entire sale process will run more smoothly. Data analysis also adds value – average sales growth and product sales splits are just two examples of information that helps buyers get a deeper feel for your business.
The administrative organisation is also more important than many think!
Customer surveys are another important element. A buyer company is much more likely to believe a customer survey telling them how great your company is, than they are you!
Finally, a crucial element is being a recognised competitor in your industry. Whether you take time to scale your business or develop niche services, you should focus on offering an experience that other businesses don’t. Leveraging your company as a market leader will set you apart from the alternative companies. This attracts high paying buyers and successful sales. Most businesses are more attractive when they’re leaders in their field. If you have the time and passion, work on your business to position it as a top competitor before selling.
How to increase your business’ value during the sale
When you’re ready to sell, there are some extra tips to increase your sale price in the sale stage.
Many price-increasing actions take place before the sale. But, owners can take action during the sale too. This is extra important if you’re focusing on a quick sale due to an excess of push factors. Exits with more push factors lack flexibility and time to increase pre-sale value. Owners in these situations should focus on increasing value mid sale.
If you want to ensure you get the highest price possible, ensure your business exit plan is succinct. This will create a smooth sale process and attract a broader range of buyers. Have a clear idea of who will cover your roles when you leave. Pre due diligence process is equally as important. Complete this process thoroughly to start negotiations with complete accounts and organised data. This gives you the confidence to ask for the price your company deserves.
Prompt communication is also essential here. You know the ins and outs of your business, and you should also be ready to discuss this with the buyers. Though this seems like a formality, remember that the buyer doesn’t know your business as you do. Take time to explain the company to them and keep communication clear and polite.
Tell the buyer before you agree to an offer if there is a significant issue that you could not sort out before coming to market. If you don’t, they may feel duped, which is when many deals fall over.
Increasing the value of your business comes down to making the business appealing. A buyer won’t want to pay a premium price for unorganised accounts and a lack of due diligence. Ensure you’re always one step ahead during the sale process to achieve a satisfying exit.
You can also approach desirable buyers alongside an organised exit strategy and planning. When you work with a specialised business broker, you can use their contacts to find a suitable match. Many brokers own curated lists of businesses in similar industries. This is helpful for business owners that want to hand their business to a buyer that knows the niche well.
Staying organised and on top of the sale process can be frustrating. There are lots of documents and accounts to remember. Many business owners choose to use a checklist when navigating the sale process. This keeps them on top of the sale, putting more value into their business.
How to get a successful exit price
One of the most important elements of a business sale is the sale price. Though the process might seem daunting, there are simple steps you can take to reach your goal.
Business owners should consider actions both pre and during the sale. There are options for all situations. Whether you take time to grow the business or complete due diligence, you have many choices. Always weigh up your options before jumping into a sales plan. You never know; you might be able to sell your business for more than you imagined.
It’s also important to remember to value your business. Every owner knows their company, but an unbiased opinion gives you more perspective. A valuation also allows owners to see if they can achieve what they want or if they want or if they should increase their market value before the sale. This information can also inform your sales plan and exit strategy – ideal for a smooth transition.
Gearing up for a business exit is often stressful, but it doesn’t have to be. The Uscita team is here to help you navigate the process and achieve a higher sales price. If your company is in the engineering, manufacturing, or B2B industry, we’re here to help. Our expert business brokers are always ready to help you achieve a better sales price.
Why not book a discovery call with us to explore more on this topic.
