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Valuing a Business for Sale—What’s It Really Worth?

Valuing a Business for Sale—What’s It Really Worth?

By Prime Advisory, 15 May 2024

Valuing a business for sale can be challenging, but there are a handful of critical factors that reliably enhance the asset’s appeal in the eyes of prospective buyers…

If you’re a small business owner, you understand just how important your prized venture is. 

Chances are it’s your largest asset.

Additionally, you probably have high hopes that your business will help to fund your retirement. 

But what is it really worth? And what sets a high-value business apart from the rest?

Naturally, you’re likely curious about just how much your venture could fetch on the open market.

Yet it’s often difficult to get a read on it.

For every business that changes hands at a substantial price, there are others that struggle to sell at all—let alone command a premium.

The question is: what makes a difference?

What Are You Actually Selling?

When it comes time to sell a business the first question is, what are you selling? 

In most cases, the answer is fixtures and fittings, plant and equipment, stock, and the goodwill of the business. 

Generally, a buyer won’t be tempted to purchase your liabilities or your business structure, nor will they want to collect your outstanding debtors. 

In short, most business sales become a transaction of business assets.

These assets are relatively easy to value with the exception of the goodwill. The value of plant and equipment and trading stock can generally be agreed upon. 

The contention tends to centre on the value of the goodwill because goodwill is made up of several intangible assets that can’t be readily quantified. 

We can all agree that there is value in these intangible assets, but the question is, how much? 

Goodwill is basically the value of the future free cash flow of the business. 

Based on how your business is structured, it is the value of the profits the business is capable of generating in the future. 

Essentially, this is what a buyer is prepared to pay for.

If a buyer has a reasonable certainty of profits and free cash flow in the future, then this is worth something. 

Contrastingly, a start-up business will typically have a higher level of risk and no certainty that profits can be generated. 

In general, a new business may need to trade for several years at a loss before it can establish itself and create profits. 

Goodwill is what you are prepared to pay to avoid the risk and the ‘time to establish’ element.

Key Factors That Influence Business Value

So, what influences business value and what will people pay for? 

Here are some of the primary factors:

  • A track record of profits, profits, and more profits 
  • Returns on capital invested—better than 30%
  • Strong growth and growth prospects 
  • Brand name and value 
  • A business that is not dependent on its owners 
  • A strong, verifiable customer list 
  • Monopoly income—exclusive territories 
  • A sustainable competitive advantage 
  • Good systems and procedures

It is possible to attract a price that is widely different from the norm.

Unique businesses, unique circumstances, and unique opportunities have the ability to produce an ‘out of the box’ price. 

If you can build something unique, then you may achieve a price beyond normal expectations. However, essentially, the market will set the price. 

If you are planning on selling your business, it’s a good idea to identify potential buyers. 

There could be a purchaser who is prepared to pay a large premium to own your business because of the accretive value or because it is pivotal to their growth strategy.

A final thought…

Even if you’re not thinking about selling your business right now, there will come a time when you will.

If you build your business with this in mind, then you should look to do the things that will grow your business value from year to year.

Set Your Business Up for Success

Need a hand to make your business as attractive as possible to potential buyers?

Get in touch with the PrimeAdvisory team.

Our trusted business advisors are experts at digging into the finer details and executing strategies that help businesses to be at their best now and into the future.

We have plenty of success stories to prove it.

Contact us or give us a call on +61 02 9415 1511.

Let’s see what’s possible.


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      The information contained on this website has been provided as general advice only. The contents have been prepared without taking into account your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.