Understand How Much to Sell a Business For
In the world of small business ownership, your company's profit is everything. It's not just a number your accountant shares with you or how much extra you can personally spend — it's a significant part of how much your business is worth. Understanding a business’s profit is understanding how much to sell a business for. Profit not only makes you love your business; it also makes people who could buy it fall in love with it.
What Exited Owners Would Change If They Could
When I talk with business owners who have sold their businesses, many openly share with me what they would have done differently in the years before their exit. They tell me they wish they had focused less on growing their sales and more on profit margins. The team at global company valuations specialist bizval echoes the importance of this, noting that an environment of higher interest rates and general uncertainty means that potential buyers are highly focused on profits, not just an appealing revenue story.
How Much To Sell A Business For?
Before we talk about increasing the value, it's important to know how much your business is worth right now. This is not easy to calculate because it depends on your financials, potential for growth, customer relations, and how solid your operations are.
A common way to calculate your business value is to multiply your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a measure of profitability) by a factor that's based on industry standards and the unique aspects of your business. This factor is called an ‘ebitda multiple’ and can vary anywhere between less than 1 to more than 10.
Understanding the true worth of your business is significant.
However, many people get stuck because they're unsure of the next steps after a low valuation.
Here’s a blog post on how to come to terms with a low business valuation.
The One Metric That Affects How Much to Sell a Business For
Once you've calculated your current business value, you know that building a business isn't just about making money—it's about making sure that money is turned into profit efficiently.
The higher the profit,
the more your small business is worth.
It’s as simple as that.
5 Ways To Increase Your Business Value
Know Your Numbers:
Understand your current profit margins fully.Reduce Costs Smartly:
Find where you can cut costs without hurting quality.Increase Your Pricing:
Come up with smart ways to increase profit.Make Operations Efficient:
Improve and automate processes to save time and money.“I own a bookkeeping business and I can’t tell you how many owners come to us saying they wanted to sell their company but they couldn’t because their bookkeeping was a mess.
Clean books help you exit. It helped us too when we sold FreeUp.”
Nathan, sold FreeUp.netFocus on High-Profit Services:
Prioritize selling those services or products that give higher profits.
We’ve created an article about six innovative passive revenue ideas that could become
the game-changing strategy you've been seeking as a business owner.
Passive earnings boost your profits and financial performance without requiring you or your team to work harder or extend your already busy hours.
By implementing one of these passive revenue strategies,
you can create additional and profitable income streams that work tirelessly in the background.
Examples of Adding Value to a Company
1. Spending Less
Cut costs cleverly to increase profit without reducing quality. Think about renegotiating contracts with suppliers you’ve worked with for years, where you’ve always paid on time or have increased the yearly volumes you’ve bought from them. These are all great reasons to renegotiate existing contracts. Bigger profit margins make your business worth more.
2. Earning More
The prices you charge directly affect your profits. Have you regularly increased prices, to align with inflation? You would be surprised how few owners actually do this, and have a mechanism built into their sales contracts.
Know which products or services not only sell best, but which ones make you the most profit. Those are the ones you want to double down on.
3. Making Business Easier
Being efficient drives profitability. Make operations easier and efficient. This cuts costs, makes customers happier, and shows potential buyers your business model is strong.
The first step to take is to document how things are being done now and agree on the best way to do it. Once you’ve standardized everyone’s way of working and things are easier, automate as much as you can.
4. Make the Business Independent of You
If you're attracting most of the business, try to build up your company's brand and bring other faces of your team into the marketing and sales conversations.
If you're the only person making decisions, you're a risk to your business, and your business is unsellable (unless you want to work with the buyer for a long time).
“It is impossible to sell a business that is completely dependent on you.
That’s why great hiring is so important!”
Nathan.
So let your business become independent of you and get your team in place. Here’s more on how your team can triple your exit price and how remote teams impact business valuations.
“Every dollar of profit becomes worth even more when the valuation multiple is higher.
How do you achieve a higher multiple? By reducing owner dependence.
A business that is dependent of the owner to run it, is one of the major reasons for a discounted valuation.”
Graham, CEO of bizval and our Business Valuation Partner.
How Sarah Increased the Value of Her Business
Sarah, who owned a marketing consultancy, doubled her EBITDA in a year by focusing on those services that made more profit, rather than those that brought in the most revenue.
She also focused on standardizing how client work was done, so her small team started working efficiently. They also saw opportunities to work with a cheap software tool to support them in executing projects for clients.
These two changes led to a successful and profitable business sale.
A Report You Have To Know As A Female Founder: The Gender Gap in Business Exits [2024 Insights]
Your Turn: A Challenge
Pick one way to increase your profit this quarter. It could be renegotiating a contract, adjusting the price of one of your offers, or improving how a process gets done by your team.
Remember, your business's profit is the biggest driver affecting your business valuation. It not only makes you love your business, but also potential buyers.
