Three Ways to Increase the Valuation of Your South Florida Business
No matter the reason for wanting to sell one’s business, every South Florida business seller wants to maximize their purchase price. If possible, many sellers can greatly help their valuation by taking long term steps that will result in buyers generally placing a premium on the business valuation. Although these steps may result in short term disruptions or even less cash flow, the long term effects on the business evaluation will be profound. Let’s explore why a business with steady and growing profits, transparent financials, and a relatively absentee owner will result in a higher business valuation.
Stable and Growing Profits A Key to High Business Valuation
Many South Florida business buyers value stability and steady growth more than any other attribute when evaluating businesses for sale. Moreover, business buyers prefer a business without customer concentration risk, which is generally defined as having a customer represent more than 10 percent of total sales. A stable and steadily growing business without customer concentration risk is more likely to be seen as a safer investment without the risk that sales or profits may deteriorate. In particular, a business with recurring revenue or a business model based on recurring customer payments (such as a subscription model) will receive even more of a premium. Of course, many businesses may simply not be able to transform themselves into a stable grower with recurring revenue. But often times it is possible to change one’s business model so as to increase the business valuation.
Example of Changing Business Model to Receive Higher Business Valuation
- Let us suppose that Bob’s Plumbing Company generates $500K of sales per year and has an owner benefit of $150K per year.
- Let us also assume that the $500K of sales is largely from new construction or remodeling projects which are referred by a few general contractors with whom Bob is friendly.
- As such, Bob is not likely to receive a high valuation for his business because of the very high customer concentration risk and because the sales are largely from non-recurring remodeling or new construction projects.
- Bob is much better off changing his business model by focusing on service revenue from repeat residential or commercial customers.
- This way, Bob will not have customer concentration risk from being so reliant on referrals from a handful of general contractors, and Bob will have a large and diverse customer base that will hopefully provide steady and repeatable business for many years.
- Even if Bob’s owner benefit decreases (to let’s say $100K per year) in the short term as a result of this change of business models, he will most likely receive a higher business valuation in the long term.
Transparent Financials A Key to Higher Business Valuation
A major step in preparing one’s business for sale is obtaining a clear and transparent set of financial records. In the short term, this can usually be accomplished by meeting with one’s accountant and obtaining historical tax returns and accurate profit and loss reports for the past three years or so. If, however, such accurate records do not exist then this will diminish the business valuation. Common reasons for not having accurate tax records include having unrecorded sales not in the tax return, not having all expenses in the tax return, or simply not having the tax returns match up with profit and loss reports or other accounting mechanisms.
A Business With Transparent Financials More Likely to Qualify for SBA Lending
- No business owner wants to pay more taxes, but if one wants to sell one’s business for the best price possible, having accurate financial records is essential.
- Without accurate tax returns and transparent financials, it will be nearly impossible for a business buyer to obtain a Small Business Administration (SBA) backed loan.
- The key to qualifying for an SBA backed loan is for the purchase price to match the appraisal that the SBA will employ to evaluate the business.
- As one may imagine, this evaluation process largely revolves around the financials that the business provides.
- Without transparent financials that accurately reflects the purported sales and profits of the business, the appraisal will almost certainly be below the purchase price.
- If such SBA buyers are thus eliminated from the pool of potential buyers, then the valuation of the business will be greatly diminished.
- As dictated by the law of supply and demand, less potential buyers (or demand for the purchase of the business) means a lower price.
- Even if it takes two or three years, a business owner may be better off by filing accurate tax returns (and paying more in taxes) in order to get premium value for their business.
Absentee Ownership Provides Higher South Florida Business Valuations
A true absentee owned business where the owner has no day to day operational role is very rare and not necessary in order to obtain a premium valuation for one’s business. There are, however, degrees of absenteeism which do play a key role in the business valuation. In general, the less active the owner is the better. On the other hand, a very active owner (including family members of the owner) may necessitate the buyer incurring replacement costs of having to replace the owner (or their family members) with paid employees or with their own labor. Such costs will eventually detract from the valuation of the business. Moreover, if the customers or employees of the business are dependent on the special skill sets or personality of the owner, then the business valuation will also suffer. Even if the owner has to change their business model and increase their short term expenses by hiring more management in order to reduce their own role in the business, such steps will be rewarded by a premium business valuation.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.