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Value vs. Sellability

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Posted by Jennifer Smith on

 

One of our favorite things to talk about is how to increase the value of small and mid-sized businesses. Most business owners know how to impact line items on their financial statements (i.e. revenue, salaries, bank balances, etc.), but we find that driving the actual value of the business can sometimes feel mysterious and overwhelming.

The biggest influencer of the value of a business is it’s recasted earnings. Most business owners make decisions throughout the year that are designed to drive down taxable income. Before a business can be valued correctly, we go through a process called “recasting” to strip out all those discretionary expenses and determine what the business is actually producing in terms of cash flow, regardless of who owns it. The higher the recasted earnings, the higher the value.

Other factors that will influence what a business is worth are things like:

  • Client concentration: What percentage of your revenue is tied to a small number of clients or to a specific industry? The higher the concentration = the higher the risk = the lower the value.
  • Legal structure: Some entity types require a stock sale instead of an asset sale and buyers will generally pay less to acquire stock due to trailing liability concerns.
  • Seller financing: Buyers will generally pay more if some seller financing is involved.

Now, the factors that influence the value may be different from the factors that affect its overall sellability. While the value has to do with a number, sellability has to do with the attractiveness of the opportunity in the eyes of a buyer.

Some factors that affect sellability:

  • Owner involvement: How integral is the current owner to the success of the business?
  • Clean books: How confident is the buyer that the financials you are presenting to them are accurate?
  • Physical and digital “curb appeal”: Would a buyer be proud to send friends and family to the business’ website or offices/storefront/warehouse?
  • Industry outlook: Is the business is a steady/expanding industry or one that is becoming obsolete?

Recently we talked to a business owner who had a very nice company and a healthy valuation. He wanted to know what impact the name of the business, its attractive office space, and location had on the value…the answer was “not much”; however, those elements make the business much more sellable on the open market.

If you would like to find out how sellable your business is, take our FREE sellability assessment at MurphyScore.com. We promise to keep your information confidential, and we won’t sell your data…this is just a great tool that we developed to help small and mid-sized business owners plan for the future. And when you’re ready to talk about determining your value, give us a call at 573.335.1885 to start the process.