Getting a valuation for your business that is lower than what you expected can come as an unwelcome surprise. It could be frustrating if you expected something higher as part of your retirement planning.
A business valuation is essential regardless of whether the price was anticipated or not. If your business is booming and profitable, then it will likely attract more interested buyers. On the other hand, if you received a lower business valuation than expected, it is probably a good idea to assess what needs to be improved to make it more appealing.
The Main Reason Why You Should Invest In An Objective Business Valuation
Some entrepreneurs would rather not invest money in having their business appraised by a professional or through an online service like ExitGuide. If you believe you can rely on what you believe is the best price for his or her business, it is likely that you will face difficulties. A buyer will want to understand how you came up with an objective price, what assumptions were used regarding growth and profitability, and analyze your financials to see how the business has performed over the past several years.
It is essential to note that this can be your starting point when you are negotiating with a potential buyer. A great deal of importance must be placed on clarifying the buyer’s plans or intentions before setting a price.
Five Things You Can Do When The Value Of Your Business Is Less Than Expected
Create a strategy for increasing valuation
This option is ideal, especially if you can wait a year or more, and it is a priority to achieve a higher appraisal to attract more buyers. This process will probably take at least a year to go from a plan to implementing these changes and seeing the results.
The main focus should be on increasing net profit. Growing revenue will also help but should not be at the cost of profitability. A great place to start may be improving marketing strategies to attract more customers, lengthening your operating hours to get more revenue, or taking a step back to see which aspects of the business you can reduce operating costs. Reducing or even eliminating some discretionary spending can make a big difference as well.
One way to go about this in a structured way is to work with a business coach who can provide you with objective solutions and assistance.
Focus on key selling points
Two key selling points that can attract more buyers are cash flow (net profit) and key assets.
Having a steady revenue and above industry average net profits are key when it comes to selling at your ideal price. Buyers want to know they are acquiring something profitable and have room to grow.
In addition to sharing profit and loss statements from the past three years, you will need to make projections of where your business is headed even without you as the owner in the next two to three years. This might be the best time to share your plans for the business to steadily support a higher income stream.
On the other hand, key assets also attract buyers. An asset is anything your business owns or has access to, such as real estate, furniture, vehicles, or equipment. In assessing the assets that you own, buyers want to see something that has real value to make the business grow or help an existing business they currently own and operate. This is why it is important to have a current balance sheet that reflects all of your assets and the current value.
In addition, buyers may also want to know how your team can manage without you. Is there a group of experienced and loyal managers and employees that can handle the business as well as you or better? This information may be of interest to some buyers.
Organize your documents for an easy transition
Preparing for a sale requires you to organize your documents so that potential buyers can easily take on the day-to-day operations. Gather all the documents relating to sales and production, insurance policies, operating manuals, as well as financial documents, which include tax returns, lease papers, and profit and loss statements for the current and past 2-3 years. Make it easy for someone to buy and take over the business.
Having a business that is ready to buy and run can make a deal more appealing.
Consider selling to employees
This is another option that you might want to consider. This may not be the most financially lucrative choice, but it does have a number of benefits. Since your employees know a great deal about the business and how it is run, it will take a short time for them to adjust. This will also ensure that your legacy and your vision are continued.
Liquidate or sell the assets
If selling the business at the price you had hoped to obtain, you may benefit from selling your assets. A Net Asset Valuation (NAV) is an easy-to-understand method of valuing businesses that can also help you sell yours faster. It is the total assets minus total liabilities.
Using an asset-based approach, you begin by taking a look at your business as a whole composed of smaller parts. These are the parts that add value to your business (assets) and portions that diminish that value (liabilities).
Here’s is a simple illustration using this method:
For example, you have $150,000 in assets and $50,000 in liabilities, therefore the value of your business is $100,000 ($150,000 – $50,000 = $100,00).
If you choose this path, take time to clean up and repair assets before marketing them to others. You wouldn’t want equipment that is worse for wear because that could be a factor in lowering the value of your business. Make sure to keep everything fully functional and in its best shape. Buyers will be more attracted to businesses that don’t need a lot of work to be done in terms of being fully operational.
Building your business value requires planning and a significant amount of time. And, it can be a cause of worry if your business valuation is not what you expected. However, learning from the appraisal will do wonders for you and your business, so don’t hesitate to get that business valuation! After all, it helps to have a starting point.