If you are looking at selling your business here are some considerations that you may consider before you investigate a possible price range of Market Value for your company.
1/ Type of Business
2/ Size of the business
3/ Historical results
4/ Market value adjustments
5/ Company structure
6/ Age of the Business
Based on the main categories above a buyer is analyzing risk based on these areas to form an opinion on price range.
Here is an elaboration of these points to consider when you are looking at a price range that would become “market value” for your business, and remember a business is worth what a motivated buyer is willing and pay and a motivated seller is willing to accept and a different combination of buyer and seller can mean a different answer.
1/ Type of business-
The most common types of business are:
- Retail
- Service
- Transportation
- Wholesale/Distribution
- Manufacturing
Based on this the highest risk businesses are retail and service businesses, and also varies based on industry type.
The next risk level is Transportation and Wholesale/distribution, and again varies depending on industry type.
The lowest risk level is manufacturing mostly that relates to the high start up cost of machinery that is needed, but then this will break down to two categories, OEM manufacturers and Subcontract manufacturers.
It is logical to assign a lower valuation to a business that has higher risk and a higher valuation to a business that has lower risk.
Our Valuation methodology considers all risk factors when Evaluating a business. Contact us to Discuss this in more detail.
2/ Size of the business
In our opinion businesses will fall into the following categories:
- Under $1,000,000 in sales
- $1,000,000 – $5,000,000 in sales
- $5,000,000 – $30,000,000 in sales
- $30,000,000 – $100,000,000 in sales
- $100,000,000 + In sales
As the business is smaller there is more information in the owners head that is more difficult for a new owner to obtain and as the size of the business increases then the management levels increase as this happens the risk levels vary substantially, so again as the risk levels change so do the valuation multiples that have an impact of the overall valuation, this does vary substantially with Industry type, gross margin, competition and management systems within the company.
Risk Factors:
- Owner/operator
- One level of management and poorly defined organizational structure
- One level of management and well defined Organizational Structure
- Two Levels of management and Poorly defined Organizational Structure
- Two Levels of Management and well Defined Structure
- More than Two Levels of management …etc.
In this process we also consider the Manager to Subordinate ratio and the sales per employee efficiency levels.
Our Valuation methodology considers all risk factors when Evaluating a business. Contact us to Discuss this in more detail.
3/ Historical results
There are only 3 types of businesses:
- A business that increases sales and profits year on year over the past 3-5 years
- A Business that has sales and profits increasing and decreasing over the last 3-5 years (up and down results)
- A business that is declining its sales and profits over the last 3 – 5 years.
It makes logical sense that the business that is increasing year on year is worth more than the business that is decreasing year on year. However there are variations to this where there may be variations with Sales, Gross Margin and lastly profit that can impact the overall picture.
Our Valuation methodology considers all risk factors when Evaluating a business. Contact us to Discuss this in more detail.
4/ Market value adjustments
This is where there is so much variation from one company to another so here are some common points to make adjustments either up or down based on “market Value”
- The owners remuneration compared to market value for his / her role
- Other staff / family members remuneration based on market value replacements
- Property ownership variations to market value – where the business owner also owns the property being used to operate the business and its not being charged out at market value.
These are the most common areas where adjustments are needed, we have seen businesses that need adjustments in both directions increasing real profit and decreasing the real profit based on market value adjustments.
Our Valuation methodology considers all risk factors when Evaluating a business. Contact us to Discuss this in more detail.
5/ Company structure
If you are planning an exit from the business its best to simplify your company structure years before you plan on selling the business, we have seen businesses that have multiple companies moving money from one company to another, where your advisers have made recommendations in the past for beneficial tax purposes. These structures that are overly complex reduce the chance of a sale.
Your role as a seller of a business is to make it as easy as possible for a buyer to gather the relevant information about your business to simply see the true profit picture.
So our recommendation is to plan in advance and simplify your structure.
6/ Age of the Business
Statistics are available that show the survival of a start up business in the first five years is a very small percentage. Of the businesses that survive 5 years only a small percentage survive to make it to 10 years.
So if your business is 10 years or older the chance of survival is greater than stated above, so then the valuation of a more mature business will be higher than one that is in the first or second 5 year period.
This is also impacted by industry, type and size as stated above.
Our Valuation methodology considers all risk factors when Evaluating a business. Contact us to Discuss this in more detail.
In summary, your business is not like selling your motor vehicle there are literally hundreds of areas that have an impact on its valuation we have covered a brief overview that can help you, a more informed seller will have a greater chance of selling your business when the time arises.
Our Methodology used in valuing a business is realistic and logical that assists us in coming up with FMV (Fair Market Value) for your business, we include more than 55 different categories to value your business, our goal is to remove the guess work and fairly value your business, we are actively seeking businesses that fit our acquisition criteria.
If you own a Manufacturing business that has been in operation for more than 10 years and has sales exceeding $5,000,000 please contact us and speak directly with the buyers, we are not brokers or selling any services. We are a focused acquisition group looking for companies that fit our acquisition criteria.
If you are an investor looking for safe strong returns please contact Us for more information.