Business data

Things that lower the market value of your business

The market value of a business is not something that can measured by objective standards. It ultimately comes down to a negotiation between the seller and buyer.

There are four main things investors are going to be concerned about:

  • uncertainty/risk
  • revenue
  • sustainability
  • growth potential

Everything else is just a part of those larger items. With that in mind, here are five things that will make investors squeamish about buying your business:

1. Lack of documentation and data

The documentation you’ll need most is earnings history and earnings projections. But you’ll also need numbers that tell the story of why those earnings have increased, and why they will continue to grow. This might include:

Having a history of these things will show that you’re a serious business that has tracked it closely,and a history of growth will imply that the data you captured was valuable in the first place.

2. Resource dependency

Being overly dependent on one “resource” indicates a high level of risk for investors. Why? Because it means the business can be crippled if one single resource falls out of place.

In the framework of resource dependence theory, resources include customers, employees, and suppliers/partners. Serving only one customer, for example, can be profitable for a business. But it also means that the business is beholden to that customer.

Learn more about resource dependence here.

3. Lack of growth potential

Investors want more than a reliable revenue stream; they want one that will grow over time.

The two best ways to show growth potential are with a history of growth, and credible market research that promises more growth. Note, again, that a history of growth will lend credibility to your market research, because it shows the research was valuable.

4. Too few valuation methods used

Simply put, one valuation method is not enough. You’ll want to use multiple methods to make your case, because all methods have their limitations. Generally speaking, they also leave out a lot of important details and intangibles.

You can see this article about three different valuation methods we like.

5. Instability within your workforce

Let’s return to the issue of risk. All the numbers in the world won’t make your business look like a wise investment if the people who make those numbers happen can’t be counted on. Are your employees going to be happy when the current owner is gone?

A history of high turnover rates is going to scream “risk”, while a history of retaining valuable talent makes your business look like a dream investment. Retention is one of the biggest challenges in business, and it’s one of the areas where exceptional businesses are set apart from the field.

How to get maximum value for your business

The above items are easier said than done. Running a business is a full-time job, and it’s hard to find the time to get your hands dirty with big-picture items like your exit strategy.

However, the biggest thing you can do to guarantee you get maximum value for your business is to start planning your exit strategy immediately. It can and should inform all of the major decisions you make.

For help in developing an optimal exit strategy, you can contact Free Vector Advisors here.

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