Factors Determining Types of Business

Seven main things will influence the price you get for your business.

Factors Determining Types of Business

  • Profit level
  • Current profit multiples in your sector
  • State of the market
  • Premium for branding
  • Premium for desirability
  • Negotiating skills
  • Size of the enterprise.
  1. Profit level

The valuation of a small business can be a complex subject. The market, however, like most things in business likes to keep it simple. Thus the initial valuation of your business is a multiple of profits.

So if your business is making $150,000 profit per year after drawing a market management salary cost and the current multiple is 5 then your business will go up for sale probably around $750,000.

Any specific asset, like property, being added to that.

A buyer will want to see a lot more detail; track record over the last few years, market potential, etc. If the profit was higher in the last two years it suggests a declining market.

So as an owner from three years before a sale you want to start manipulating the figures to increase the profitability.

This means that major investment, which reduces profit in the short and medium-term, will reduce the market value of the business. A new buyer will also be looking for ways that he or she can grow the business.

So anything that suggests the business can be expanded will fetch a premium.

  1. Current profit multiples in your sector

Multiples are set by the market. They vary probably between about 4 and 12 depending on the sector, size of the business and current market conditions.

Then they are adjusted for a specific business, depending on the negotiation of other factors to be taken into consideration.

  1. State of the market

Like every other market, that for buying and selling a business goes up and down. It all depends on how many buyers and sellers there are at any particular time, the state of the general economy and confidence levels.

One can pick an ideal time when one is ready to sell.

  1. Premium for branding

A good brand can gain not only a premium but a substantial premium because a brand is expandable easily.

Much effort should be spent on establishing a clear brand for your business and one that has more than limited market potential.

  1. Premium for desirability

Various other factors can make your business more desirable to a buyer.

For example, if a national network of employment agencies does not have an operation in your town; it will probably be cheaper to buy your business than to set up their operation.

A buyer, whether an individual or a company, can have special skills that as soon as they buy

your business they instantly improve its value. They have management skills. A marketing expert may see they can use their talents to grow the business.

A computer expert may see an opportunity to make it more efficient and reduce operating costs. They both have a client list or a business that is synergized with yours.

  1. Your negotiating skills

Like anything traded, negotiating skills will determine the final price. If you are not a good negotiator employ one.

I suggest a well-chosen professional firm would probably increase the final selling price by more than their fee. Not to mention finding someone who you were not aware of.

  1. Size of the enterprise

As firms grow the multiple they attract grows, mainly due to bigger buyers having bigger pockets and a more competitive market. There is a real incentive, therefore, to merge or acquire as you grow to raise the multiple.

In practice, merging two businesses might not now be that easy, if they have different cultures.

On the other hand, rationalizations in operating processes might allow some cuts and make them more profitable before increasing sales.

For most entrepreneurs, their life wealth is their business and thus their pension scheme. Selling means that at least half of it can be put in the portfolio of investments meaning that your risk is greatly reduced.