The first thing every entrepreneur or business owner wants to know is how much is my business worth? This is a complex question to answer, as there are so many variables, so let’s break it down. The real truth about the sale of a business, is that although it may start off as a science, it is greatly affected by emotion. In reality, the only true value of a business is the price a buyer is willing to pay. This is different for every buyer, so to maximise it, you must first understand the
The first thing every entrepreneur or business owner wants to know is how much is my business worth?This is a complex question to answer, as there are so many variables, so let’s break it down.The real truth about the sale of a business, is that although it may start off as a science, it is greatly affected by emotion. In reality, the only true value of a business is the price a buyer is willing to pay. This is different for every buyer, so to maximise it, you must first understand the aspects of the business that will affect its value to a buyer and work to enhance and maximise these aspects.While a seller is likely to consider that the value of their business should take into account the years of time, money, blood sweat and tears they have invested into it, this is an emotional response to costs that have been sunk into the business and may never be recovered.A buyer is not remotely interested in the past. Logic tells us that a buyer is only interested in the future maintainable profits the business will provide directly.Equally as important are the benefits the business will provide indirectly. A buyer will be very interested in a business if it can gain additional benefits from the business, such as:Is the business replicable? Being able to scale is a key factor in analysing the value of a business. The more replicable, the more value.Can the new buyer reduce costs from shared services or increased volume through buying with another business?Can the buyer gain access to new markets?Can the buyer make use of the new business’s brand to enhance other existing brands it holds?Can the buyer make use of technological improvements or intellectual property?These are all logical financial benefits that can be analysed and, to some extent, be used to calculate a value range. These are very important and logical processes that must be considered. But there is still more to it than this.If you think about the way we buy as consumers, we know that more than 90 per cent of our decision-making occurs in the limbic system, the emotional part of our brain. Our use of logic dampens after we have subconsciously made up our mind. This process is no different when buying or selling a business. The only variance is the role that logic plays in the sale of a business.Like all buying, a buyer will be driven by emotions. These emotions are how the business makes them feel, how it will change the way they are perceived by others, how it will affect their lifestyle and what the business brand stands for.As humans, we are attracted to people who are “fit”. Fit mind, fit body and fit spirit. For your business to be attractive to a potential buyer, it must be fit. And if you maximise the attractiveness of your business to a buyer, you maximise the sale price.Here are eight steps that will ensure your business is “fit” for sale:Strategy sensor: Create a list of potential buyers who would be interested in your business. Don’t forget that this should include competitors. Research what tangible and intangible assets are valuable to those buyers, then set out to maximise and highlight these assets in your strategic plan.Brand-aid: Ensure you can clearly describe the strengths of your brand and its uniqueness. Ensure you have integrated communication channels that deliver this message.Customer connection: Show that you know who your customers are, not only their demographics but their habits, their personalities and what they desire. A strong database with regular, appropriate and targeted contact is very important. Ensure your customer service in-store is always being tested. You are guaranteed a potential buyer will undergo a mystery shopping experience so get one done yourself and fix the gaps in your service delivery.Effective people: Show that you live and breathe the phrase that people are your best asset by having a structured performance management system that has the buy-in of the staff. Is there a succession plan and coaching and mentoring for all levels? It is important to show that the ownership and management are separate or the new buyer will have to factor in the sale price the owners continued involvement.Category cardio: Capture financial data on working capital and stock so you can illustrate Working capital performance and ratio returns. By showing category margins a buyer can determine where their involvement may enhance the results.Fiscal physical: You must be prepared to show the last three years of financials, so maximise revenues and margins whilst minimising expenses. Remove all personal and non-essential expenses. Do not undergo new initiatives that will not see an immediate benefit. Sell any surplus assets or move assets you won’t receive full value. Finally ensure your numbers compare well to industry benchmarks.Visual impact: Ensure your business physically looks better than it has ever looked before. This is so often ignored. If it is a weakness of the business, then get advice on how to make your business shine. This is critical. We are emotional humans and a business will always sell for more if it is visually appealing.Omnichannel: Ensure your business seamlessly integrates digital into the customer experience. This means making digital integration remove pain points and stimulate your customers’ emotions.This is a brief snapshot of the steps required to ensure that a retail business is fit for sale, but experience shows this is valuable to any business contemplating selling. Success will be determined in the implementation of these steps.Remember every good business always should be ready for saleCo-written by Juston Jirwander, a chartered accountant, venture capitalist and business fitness specialist at Retail Doctor Group.