As a business owner, one of the biggest questions you'll face when considering selling is: What's my business really worth? There are many factors that help establish the value of a business, so in this blog post, we’re going to talk about some of the most important ones.
Size
If we take into consideration two companies that manufacture or provide the exact same services, the size of each company can significantly influence its value. Larger businesses often have established customer bases, more scale, and greater market presence, making them more attractive to potential buyers.
Margins
Higher profit margins typically indicate a well-managed operation that effectively controls costs while maximizing revenue. Investors are often attracted to businesses with healthy margins because they suggest efficiency and potential for profitability. Analyzing both gross and net margins can provide insights into your company's financial health and competitiveness in the market.
Strong Year-over-year (YoY) Growth
A track record of strong year-over-year growth signals to potential buyers that your business isn’t just lightening in a bottle with one time performance, but it’s steady and growing. This growth might come from increasing sales, expanding your market reach, or launching new products. Buyers will pay higher multiples for companies who have strong growth versus companies that have significant swings year over year.
Recurring Revenue
Recurring revenue means you are generating predictable, reliable income, which reduces risk for buyers. If two business are out to market, one with recurring revenue streams and one with lumpy, project-based revenue, the business with the recurring revenue stream will get a higher valuation. Some companies have a mix of lumpy and recurring revenue and the recurring revenue piece is looked at more favorably than the other non-recurring streams.
Management Team
Buyers want to invest in businesses that continue to prosper post-sale. A capable team who manages operations effectively, adapts to changes, and drives growth will result in a higher valuation. Highlighting the strengths of your management team can assure potential buyers of a smooth transition.
Customer Concentration
While a loyal customer base is an asset, heavily relying on a few customers can be risky. High customer concentration increases perceived risk, as losing a major client could severely impact revenue. Businesses with a diverse customer base are valued more favorably. Assess your customer concentration and take steps to mitigate any customers generating 15-20% or more in annual revenue.
Timing
Economic conditions, industry trends, and market demand play critical roles in determining the best time to sell. Selling your business in a strong market typically results in significantly higher valuation metrics. Stay informed about market conditions and be strategic about your sale timing to maximize your company’s valuation. In our current economic client, we expect to see businesses that heavily rely on China sourcing will be materially impacted with the proposed tariff changes of the new administration. This means these companies will not be valued as highly as they were a few years ago.
Valuing your business is a complex process that is impacted by many factors. Understanding how these metrics impact your business's valuation will help you as you prepare for a sale. By addressing these key elements now, you can position your business attractively in the eyes of potential buyers, when the time is right to exit.
Business Acquisition & Merger Associates (www.buysellyourbusiness.com), a Charlotte, NC advisory firm, assists business owners in growth recapitalizations, business transfers to financial or strategic buyers, and management buyouts. BAMA also helps companies grow by providing buy-side sourcing services that identify potential add-on acquisitions to expand geographic footprint or add strategic products and capabilities.