5 Shocking Mistakes Killing Your Business Valuation

INTRODUCTION:

 Understanding what drives up business value and also what drives it down is critical in any business plan with a desired exit strategy.

Reputable business valuers and small business accountants will know for any of their clients that are buying what can be pointed to when trying to negotiate a far lower price than what is being asked. So here are 5 mistakes that can be avoided when trying to get the business valuation and sale price you desire.

Figure 1: Has the time come to put your business on the market? Will you get what you want?

1. not understanding what your business is worth now

I get asked all the time how much is a business worth and sadly like many who are looking to sell their own home, the value I estimate the business to have, can quite often be a fair a bit less than what the owner is seeking. What's even worse is somebody selling their business when they actually could have achieved a much higher price! Not understanding how a business is valued and what the tax consequences can be, can leave many short changed and wishing they had never sold in the first place.

Now it is important to note that a business can sell for more than its theoretical value as price and value can be two completely different beasts. My response to this will usually be "wouldn't you rather have some idea of what the business is worth now and do something about it? Or would you prefer to just wing it and put a price on that you want and hope like hell somebody wants to pay that much for it?"

Before selling, be wary of unscrupulous brokers who are keen to get a listing and large commission. To have an understanding of what would be a good sale price for you and what wouldn't be, get a small business valuation by experienced business valuers Sydney. If you don't happen to sell, at least you will be able to use the report as part of your business plans so that you know you are heading in the right direction.

2. failure to address cash flow issues

Very few potential buyers of your business will want to pay top dollar for it if it is struggling for cash. Consult your small business accountants and understand what your cash flow key performance indicators are. Devise a plan to address these issues with them so you can eliminate the negative effect it will have on your sale price.

We always highly recommend the powerful use of 3 way budgets for any cash flow forecasts. Not only do they let you understand what-if scenarios with debtor days, inventory days and supplier days, they also show you what your profit, cash and balance sheet will look like at any one point in time. As a small business accountant Sydney, this tool is my number one friend when it comes to achieving business growth and sale prices for my clients.

Figure 2: "Now I've sold my business I can go out on the boat without a care in the world."  Photo courtesy of Balmain Baz

3. business plan does not (or barely) exists

Very few people like doing business plans but the reality is that if you want to increase the chances of getting a decent price for your business, you can use it as a selling tool to potential purchasers. If I were to look at buying a business that had no plan in place, I'm either going to walk away from it altogether or I'm going to offer a much lower amount as there is obviously going to be a lot of work involved. Having no plan would indicate to me that the owner is flying by the seat of his or her pants so it stands to reason that there could be some skeletons in the closet as the place is just not organised.

Good operators = good business planners = less risk in buying = higher business valuations.

4. Failure to act on a flat lining or contracting business

If you're hoping to sell your business within the next 1 to 5 years, do your numbers indicate that sales are static or contracting? Now if there is a good reason for this and there are much higher profits then great.

However, a flat lining business can be just like those that are shown on that television show ER. Is your business beeping regularly or does it scream out the horrendous flat line noise that sees the team searching for a defibrilator?

It's nearly always to better sell your business that is showing growth each year because most times a business that is growing is staying ahead of the curve of its competitors. If you're trying to sell on the way down, be prepared for objections and why the business should not get the higher multiple when working out goodwill.

Figure 3: Not acting now is like trying to bring a dummy back to life.

5. reactive (not proactive) with your small business accountant

If you are thinking of selling, make sure you communicate this with your small business accountant. Having them understand what your plans are can improve the decision making process and also help plan for tax minimisation once the sale occurs. Consider monthly or quarterly meetings to make sure you are on track.

Put your plan in place and then consider working closely to keep it in check. For those that prefer it, consider using a business coaching service.

CONCLUSION:

There is no law that says to sell your business for maximum value you have to avoid any of the 5 deadly sins noted above.

However, if you want to increase the chances of getting what you want and when, take action immediately or you might find that in many cases you are better off trundling off to the casino.

Unless you get lucky, you will have at least torn money up quickly rather than wasting 10, 20, or even 30 years of your life!