If you’re considering selling or transitioning out of your company, you’ve certainly worried about the future of your organization and its exit strategy.
One of the most stressful parts of selling is the business valuation – the process that puts a dollar-value on all of your hard work. Here are the three levels of valuation you should understand before selling your business:
1) The Reduced Valuation: Most businesses that get a reduced valuation are disorganized or progressively declining.
These are some contributing factors:
• Poor accounting
• Poor record keeping
• Potential liability, typically referring to a history of unethical decisions evident in financial statements, lawsuits or other business dealings
• Declining revenues
• Declining gross margins
2) The Enhanced Valuation: This will show that your business is better than your competitors.
Here are some examples that give businesses an edge:
• Gross margins higher than the industry average
• Inventory turns higher than the industry average
• Profit higher than the industry average
• Conservative balance sheet management
3) The “Rockstar” Valuation (the one you want!): To get to this level, your business must have a unique market position and a unique ability to create opportunities for shareholders and customers.
• Growing revenues and profits of at least 15% per year for three consecutive years
• Use of technology creating a barrier to entry with your product, service, service delivery, sales process, manufacturing process, etc.
• Fulfillment of a strategic business niche in the industry that is difficult or impossible to replicate
The valuation process can be a stressful and confusing endeavor, and to properly value your business, make sure to have a team of experts to walk you through the process.