Running a business has never been more popular, as increasing numbers of people swap the predictability of life as an employee for the risks and rewards of life as an entrepreneur.
For many business owners, the ultimate goal is to sell their business. However selling a business, especially if it is your first sale, brings its own, unique set of challenges.
Selling a business is often complex
Anyone who has already sold a business in the past will appreciate the complexity of securing the final sale – whether to a trade buyer or equity group – and the importance of obtaining the best possible terms.
When trying to sell your business, the million-pound question is, ‘How much is it worth to a buyer?’ Estimating this hinges on how much profit they think it will make, balanced by any perceived risks.
Metrics like cash flow, profitability, and asset values are starting points, but what if there are no physical assets?
Many contemporary businesses have few tangible assets beyond office equipment—and some don’t even have that.
Their value is based on intangible assets—a brand, reputation, customer goodwill and loyalty, intellectual property (such as patents or protected designs), and future potential for growth.
In many instances, especially in the case of digital and tech businesses, it’s these intangible assets that provide the bulk of the company’s value.
How do intangibles like goodwill impact a valuation and what are some of the key things to be mindful of when starting out on the journey towards a profitable exit?
1. Understand what you are actually selling
Since intangible assets are much more difficult to value, anything you can do to make them more tangible will have a positive impact on the final valuation of your business.
This is because when you sell a business, you’re essentially selling its future potential and the story of its future profitability to prospective owners.
If they believe in its potential and your story and they are confident it will grow well, it will command a premium value.
One of the clearest indicators to potential investors that the ‘story’ will have a happy ending is the level of customer satisfaction and retention levels a business has.
In the case of SME businesses, this is a key part of the goodwill value of the brand.
Consider that a large proportion of future revenue is likely to come through a small number of existing customers, e.g. from direct sales and via recommendations.
How likely are these customers to keep on buying? Will they give you a positive recommendation to secure new business?
Good customer reviews will increase the likelihood of getting referrals from other existing customers, generating a positive uplift in potential sales and the future sales pipeline. In turn, this positively impacts the buyers’ view of value.
For service-based businesses especially, goodwill and brand reputation are everything when it comes to selling, as prospective buyers can almost certainly buy the other attributes of a service business for considerably less elsewhere.
2. Reviews provide tangible evidence of customer satisfaction
Typically, when potential acquirers are considering whether to buy a business, they will research the marketplace the business operates in to get direct feedback on the brand and why they are an attractive proposition.
Whether a buyer is looking online, undertaking other research or asking customers directly, canvassing reviews is a really important part of the due diligence process and an important parameter through which the business’s future potential can be evaluated.
Customer testimonials, especially when named, are a good starting point, as is having some press coverage highlighting interesting case studies, although this latter option may not be feasible for every industry sector.
Having evidence of satisfaction in the form of independent online reviews is typically regarded as most impartial and also gives the buyer conducting due diligence an immediate starting point from which deeper research can be focused.
This approach is also accessible to any industry sector. For instance, if service levels are a key selling point and emphasised in reviews, consider how to further demonstrate this to a would-be buyer.
3 Appreciate how businesses are valued
When reviewing a possible acquisition, the prospective buyer of a business will consider financial performance over the previous two to three years and future prospects—the sales order pipeline, the strength of the ongoing customer base, customer statistics in terms of retention/conversion rates, and new customers won.
In addition, because selling a business ultimately means management changes – always a difficult transition to make – happy customers and positive reviews will frequently mean any change of ownership will have a stronger foundation at the outset and most likely be less detrimental.
It is tricky to quantify exactly how big an impact strong goodwill in the form of customer reviews can have on a business’s selling price.
Although it’s impossible to put an exact value on the difference it can have in a selling situation, experts suggest it could be anything up to 50%.
In many instances, a seller has secured a much higher price during a sale due to enhanced product and customer goodwill, plus the company’s general reputation, which was evident from reviews.
High customer satisfaction ratings demonstrate confidence, and buyers are often willing to pay a premium price, even though their financials are actually not as strong as they could have been.
Ultimately, when a business has successfully developed a strong reputation for quality products and customer service, it can be regarded as a desirable proposition, but profits are not always the deciding factor.
This guide has been written exclusively for ByteStart by Gavin Mullins, CEO of Eooro.com
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