What factors increase or decrease business value?
Factors that increase business value
1. Organized Up-to-Date Financials
If the financial workings of a firm are not organized within acceptable accounting practices, a buyer will be very reluctant doing his due diligence. There should be an organized consistent flow of revenue and expenses flowing from invoice to general ledger to financials to tax returns. In addition, owner perks should have an organized provable paper trail.
2. Annual Increasing Sales
Even a small increase of 5% a year in sales shows a completely different picture than one of an equally decreasing annual amount. Lenders and buyers will be equally concerned if sales and or profits are sliding even slightly.
3. Key People
One of the most important elements to insure buyer's success in the first years of new ownership is to have key employees staying in the firm. They will have knowledge of internal operations, products and services and also be involved in continuity of relationships with clients and suppliers. Often, the continued tenure of employees will be the difference between success and failure of the new ownership, therefore, positions influence value.
4. Systems and Structures
Procedural and training manuals in a business organization are signs of a strong firm. The ability to not only replace lost workers, but also get them trained in a minimum of time is of paramount importance to a new buyer. Replication of the business model with systems and structures in place is what should be strived for to achieve.
5. Formal Business and Marketing Plans
Written, and more importunately used, business and marketing plans are a sign of an organized business and a can provide a good roadmap for a new owner to follow. They can be a tool for the whole firm to use to get to the next business level.
6. Organizational Charts and Job Descriptions
A clearly defined organizational chart that shows the names, basic job functions, and time in grade in the firm and industry should be a part of the Business Plan. It should include thorough job descriptions for all employees including the owner. As part of the due diligence process, a purchaser should be able to read and basically understand the general functions of all employees.
7. Strong Sales Force
How effectively you attract customers equates to immense value in a business. A trained sales force is a tool that a buyer can count on to help in transition and to ultimately increase sales.
8. Cross Trained Employee Base
Most small closely held firms have employees that must wear many hats. Being effectively cross trained in related duties insures continuity of operations during difficult staffing situations.
9. Owner Removed from the Business
When an owner has virtually removed himself from the daily operations and customer relations in the years just prior to a sale, he has created an environment that can continue easily without his presence. If owners are deeply involved in the day-to-day running of the business and have close relationships with customers the business will likely suffer the negative effects of owner displacement.
10. Reduced Owner Perks
It is a lot cleaner for a buyer to take over a company in which the cash flow is in net profit and owner salary. When perks are "embedded" into the financials, there is more importance placed on due diligence and recasting.
11. Diverse Long-Term Client Base
A large number of long-time, loyal clients, none of whom individually account for more than 20% of revenues, is ideal for buyers as well as lenders.
12. Intellectual Property
Even without patents, copyrights, and trademarks, many businesses have specialized knowledge or services unique to that operation. This collection of knowledge is an important asset of every business enterprise.
13. Proprietary Products and Processes
Having a property product or a copy written process is viewed as a key business asset that can add a lot of value. This type asset is not prevalent in many small businesses, and those having them will carry a premium in the market place
14. Good location
Even in service and distribution type firms, location is important for most businesses. Convenient arterial flow to customers and proximity to suppliers are often important to success. Frequently, company location is key to employees that live near the workplace for whom relocation of the business is monetarily unfeasible.
15. Well Designed Website
Firms that show increased business activity from the aid of a well designed website have an important intellectual asset. The existence of this tool and the ability to attract hits over recent years is an effective tool for prospective buyers to measure.
16. Good Internal Layout
A business internal operation should "flow" from workstation to workstation. The tour of the facility by the owner should effectively show how the business work moves though the organization.
17. Good Overall Appearance
A business should have both external "curb" appeals and an orderly professional inside appearance. Clean, organized offices and warehouse areas make a big impression on potential buyers.
Factors that decrease business value
1. Incomplete or Inaccurate Records
If financial records are not organized and maintained in keeping with acceptable accounting principals, buyers and their support group will be unable to effectively determine the owner's cash flow of a business and subsequent value. This not only makes a business less valuable but bad records usually make a firm unsalable.
2. Un-provable Owner Perks
Owner perks usually fall into the "grey" area of accounting. When perks are embedded and cannot be shown with a clear paper trail, the buyer faces the dilemma of whether to overlook the issue or move on to the next buying opportunity.
3. Unreported Cash
Although it could be perceived as a source of cash flow, unreported cash cannot be used in the calculation of a business sale price. In fact, unreported cash is often thought of by buyers as a fraudulent activity possibly as a foreshadowing of other illicit issues.
4. Bad Attitude of Seller - Unmotivated Seller
If a seller is not cooperative, or is not forthcoming with information or willing to answer buyer's questions, they are often perceived as unmotivated. Unmotivated sellers are a common deal killer for prospective buyers.
5. Questionable Reason for Selling
It is very important that buyers understand the true reason why an owner is selling. When a seller is 60 years old and ready to retire, the buyer has a good feeling. If the seller is 45 and only owned the business a few years, buyers have reason for being suspicious of undisclosed issues with either the business or the industry.
6. Large Working Capital Needed
In a scenario where significant cash and accounts receivable are needed to operate a business, this needs to be figured into the sale price. Often businesses are priced with no attention to the funds needed for operation. It is important for purchasers to accurately measure the average working capital needed to resume operations.
7. Poor "curb appeal"
If the first sight of the business is unattractive or unprofessional looking, a negative perception could be given to the buyer. A poor outward appearance could be a sign of other potential issues.
8. Bad location
Locations have utility to all business operations. If a firm does not have good ingress and egress, proximity to clients and suppliers, operations could suffer.
9. Large Customer Concentration
Third party lenders are so concerned about this issue that they have a special set of valuation formulas to determine the effect of a loss of a key customer that accounts for more than 20% of total revenues. Businesses with a diversified customer base will see a premium over those that don't in the eyes of a buyer and a lender.
10. Week Infrastructure & Lack of Key Employees
Key employees and good systems are crucial to the success of a new owner. They provide continuity during the transition process. Owners that are heavily involved in daily operations are hard to replace and can have a negative impact on the value of the business.
11. Inconsistent Yearly Financial Performance
This is a red flag that all buyers and lenders will focus on. Inconsistent financial performance is often an indicator of an unsolvable business problem. Buyers are usually advised to move on to the next buying opportunity.
12. Declining Sales
Even a slight annual decline in sales shows a completely different picture than a slight annual sales increase without a valid reason. Lenders and buyers will focus on the reason for the decline which could be a sign of trouble for the business.
13. No Sale Force
The lack of a sales force is a sign of a firm that might not be able to weather a sales downturn or other business issues. It's important to have a plan for continually obtaining new business.
14. No Formalized Business and Marketing Plans
The absence of formalized business and marketing plans are an indication of an out-of-date business operation. A firm without this type of direction is usually dependant upon its existing client base and does not have a clear path for growing and improving operations. Plans provide a way to measure progress.
15. Poor/unclean Appearance
If a buyer sees a messy and unclean place of business he may perceive that the business is not well run.
