If you are thinking about selling your business your immediate questions might well be ‘How much is my business worth?’ and ‘How do I increase the value of my business?’. But one of the things we encourage our clients to consider is what might be holding the valuation down, and how this can be addressed before going to market.
Here are five of the most common causes of depressed valuation and how you can address this when it comes time to sell up.
Financial irregularities
This is not talking about fraud, or seriously dodgy accounting practices – although if they are present you need to do something major about it quick! But even small discrepancies, inconsistencies or creativity can have a downward impact on value. This is because even honest mistakes create doubt in the mind of a buyer and increase the risk profile of the acquisition in their eyes.
The good news is that this is relatively easy to do something about. Giving adequate time and attention to the preparation stages of taking a business to market should allow you to identify any areas of concern. A third-party like Entrepreneurs Hub can help with this, after all an independent pair of eyes is always helpful when it comes to figures.
A red-tape tangle
This could take the form of being behind on legislation changes, out of date paperwork, unsigned contracts, or just simply a bit of a disorganised filing system. It’s well worth taking the time to straighten things out, a perceived messy business will be worth less in a buyer’s eyes.
The more serious side to this is serious litigation against the business, not small payment disputes, but things that may have a lasting and damaging impact on the company or the brand. As with all of these issues, it needs to be addressed at the appropriate time – it doesn’t need to scupper a deal, but you must not try to hide it.
Diversity
You might be thinking that diversity is a good thing, and you are right of course, in most cases. But for diversity to really add value there needs to be a complementary link between the diverse elements. A common example is property. It’s not uncommon for a small business owner to also own a rental property or two, and not uncommon for those to be held within the business. However, when it comes to selling a business, these can be a complication that is ultimately detrimental to value. Anything like this should be extracted from the business as part of the preparation for sale.
Obsolete technology
When buying a house, it’s not unusual to identify a few things that need updating, refreshing, redecorating, or completely ripping out and starting again. These are then often used as negotiating tools to drive down the price. In the same way business operating systems or technology that is obsolete, will drive down the valuation.
The negative impact on value will almost certainly be greater than the cost of upgrading systems, so if it is feasible to do so, it is worth ensuring that systems are brought up to date – or at least plans are in place to facilitate the upgrade.
Balancing on a point
A former colleague of mine was very fond of the saying ‘you are balancing the business on a point’, usually accompanied by an appropriately triangular hand gesture. What he was referring to is quite common among small, and even some quite large businesses, in that a significant majority of their work comes from one source.
This has probably been quite good for your business up to now, but a buyer will see risk in this. What if the client doesn’t like the transition of ownership? Or more basically, what if the work simply tails off due to a change in strategy or the economy, or some other reason beyond your control?
As with everything in this list, it doesn’t make your business unsaleable, but it may limit the offers you will receive. If this is a concern you might want to consider investing in a sales drive to broaden your client base and reduce the perceived risk in the mind of a buyer.
So, in conclusion, it’s worth thinking about things that are dampening the potential value in your business as well as things that will increase value. You may find that some simple changes and preparation can significantly change the profile of offers you receive.
If you want to talk to someone about how to identify and address these issues, we’d be delighted to hear from you.
