What’s your small business worth?

I get this question often, but unfortunately there’s no simple answer. Let me break down some of the aspects of your business you need to think about when considering its value:

1. Does your business have fantastic potential?

Trick question: buyers are far more interested in a track record of strong profits, or solid high-value contracts, than in your sales pitch about ‘Uber for landscape gardening’ (and no, I don’t know how that would work). Obviously your business will be more valuable if buyers can see a strong path towards growth, but pie-in-the-sky businesses are available very cheaply on TradeMe – ideas are much easier than execution when it comes to building a valuable business.

2. How much profit does your business generate each year?

The company’s revenue and assets are the best guide to its value. If your business generated a profit of $50,000 last year and you can show that’s likely to continue for at least another two years, you could value the business at $100,000. You’ll also need to add in the value of any assets, like machinery or vehicles. But there are several caveats to this rough estimate.

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3. Are you the absolute lynchpin of your business?

This is common in small New Zealand businesses – the owner has built up superb loyalty from his or her customers but this loyalty won’t necessarily extend to the new owner. The result is a business where the only value is in the assets. Similarly, quite a few small business owners are not being paid a market salary by their own companies; they just draw out any profits as cashflow allows. This type of business isn’t likely to be valuable to a new owner unless that cashflow is demonstrably excellent and reliable.

4. Is your business in an industry that’s easy to value?

Companies in the professional services sphere are easier to value: law and accountancy firms, property management companies and other similar companies have a book of fees or a rent roll or some other easily measured way of seeing projected cashflow. Other businesses are much harder to put a price on – think online businesses, new businesses, consultancy services and so on. They’re worth exactly what someone is prepared to pay for them. Finding that someone can be the tricky part.

5. How many buyers are interested in your business?

Unfortunately, there are more businesses for sale than buyers. Many New Zealanders love the idea of starting their own businesses and would rather take a chance on a new venture than spend money on an existing one (even when this may be both costlier and riskier in the long term).

Whatever type of business you have, you need to be able to show it to a prospective buyer in a positive light to get the maximum price. This means having all your accounts in order, demonstrating your revenue and track record, and showing where the value lies. Your accountant should be able to help you with all these documents – or give me a call and I’ll help you put together a full presentation pack to help you maximise the value of your business.