Risk is an integral part of determining the value of a business. You may think that if your company is making a lot of money it should carry a high value. However, when you decide to sell your business, buyers will look at more than just your bottom line. They want to be reassured that their investment carries as little risk as possible, and they will pay a higher price to minimize the risk. Here are a few ways risk can affect the sale price of your business.
Management and Staff
Labor can affect the value of a business in multiple ways. The difficulty of being able to replace employees is certainly a factor, and is particularly relevant in our current labor market. Your ability to find new employees can be dependent the on the salary offered, the size of the labor pool, as well as the skill and education requirements for various positions. If you company is dependent on a unique skill set, do you have access to hiring people who can meet the requirements of the available positions? If employees are a challenge to replace, it could hinder the growth of your business, which would present a higher risk to investors.
Do you expect key employees and management to stay with the business after a change in ownership? The last thing a new owner wants to do is have to replace a bunch of employees shortly after taking over a new company. Having to do so could be a major setback that affects their immediate profits and derails their plans. If any important staff members are relatives or friends, it could be a signal to potential buyers that they will not stick around. Similarly, your business should have depth and not be too dependent on a few key employees. This might be difficult if you have a small staff, but you essentially do not want to be left trying to pick up the pieces when someone leaves.
Are key staff members due for pay increases? If so, it could put pressure on new ownership to hand out raises or loose people. How old is your management staff? Older employees are typically more resistant to change, especially if they are close to retirement. Having a staff that is willing to adapt to change and grow with the company can help boost its value.
Employee work conditions can also affect the value of your business. How does your company deal with accidents? Are they common in your industry? If so, make sure staff is properly trained, with regards to safety procedures and focus on limiting accidents. This helps to reduce liability and risk.
Does your company have enough cash reserves? How are you getting paid and how often? Making sure your receivables are up to date is critical. Too many slow paying customers could drain your working capital, which can slow your growth.
Having a variety of suppliers is another way to reduce your business’s risk factors. If you are tied to one supplier, you are at their mercy when it comes to price increases. If the supplier isn’t stable it could present another problem. What if they go out of business, or their supplier has an issue? You need to have backups in place so you are not overly dependent on one supplier. Keep track of your costs, and plan for future costs. Without having an idea of your future costs and expenditures, you will not be able to make accurate projections or budget.
Just as you need to have diversity with your suppliers, you also need a diversity of customer accounts. If business depends too much on a few large clients, buyers will think that it’s just a couple few lost customers away from tough times. This is especially important since customer loyalty can shift after a change in ownership. Your business should be able to withstand a few setbacks without putting it at risk of losing money.
Buyers will compare your business to its competitors, so it’s important to know how you stack up. Do you own any intellectual property, specialized equipment or systems that give you a competitive advantage? This can come in the form of technology, recipes,
specialized training or procedures. These unique characteristics will give your company’s value a big boost. If you are targeting a specific group of customers that no one else is, it will also help increase the value of your business. Conversely, if your company lacks any competitive advantage, doesn’t have a unique niche, or hasn’t cornered part of the market, it won’t stick out from others and its value could suffer.
For some businesses, such as retail shops and restaurants, the physical location plays an integral role in their success. For others, it is not as critical, but there are other characteristics of brick-and-morter businesses that contribute to their value. What is the length of your lease? Will your rent be increasing son? Buyers will examine the terms of your lease and make sure they are favorable to them.
Do your current facilities support current and future business operations? If your business is on the verge of outgrowing its location, or the building is in need of repair, it could pose an issue. Do you own the building where you run your business? This can add value to your business, but it can also make it more difficult for a buyer to upgrade their facilities, if they need to after closing. Reduce the risk that your location can present to a buyer by trying to renegotiate lease terms and price, or scouting new locations, if necessary.
When you are selling a business, remember that buyers are investing in its future performance. Since buyers are risking their money on the future, the amount they are willing to pay will be based on how big of a risk they are taking. You may be running a successful company, but everything comes under scrutiny when it goes up for sale. By minimizing your risk factors, you will add more stability to your business and subsequently, more value.
Are you thinking about selling a Southwest Florida business that you own, but aren’t sure about what it’s worth? Corporate Investment Business Brokers (CIBB) has been helping businesses of all sizes in Fort Myers, Naples, Sarasota and all of the surrounding areas, sell for their maximum value for over 35 years. Contact us to get a free, no obligation, business valuation estimate and find out if selling is the right plan for you.
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