13 Factors that influence the value of your business

There are several elements that can influence the value of your business. Here is a list of different factors that affect value and sale of your business. Read on to better understand your business’ value.

Type of Business

Franchise businesses are perceived to be safer to purchase than similar non-franchised operations. This is due to their success formula, franchise manuals and the franchisor’s continued support and advice.

Asset Value

You could have two different businesses with the same net profits but one is a service business with a very low asset base and the other an engineering concern with a very high asset base.

Let us look at the example below.

Logically you would pay more for the engineering business.

The question is how much more?

Trading Hours

Generally, a business with longer trading hours will not get as high a price as one with shorter trading hours.

Lease on the Premises

There is an old saying that says: “If you don't have a lease, you don't have a business."

Any buyer needs security of premises tenure in order for him to make a return on his investment, make a profit.

If there is no right of renewal, the buyer would find himself without anything to sell and needing to move to new premises.

There are, of course, some businesses that don't require a fixed address to operate as long as they have the same phone number.

Rental of the Premises

Although rent is covered by your monthly expenses, high rental costs can deter the majority of buyers from purchasing the business and make it more difficult to sell.

Manager

If the business is "manager run", the buyer have the option to either keep the manager on, to have more time to focus on another business; or to let the manager go and run the business himself to not pay the extra salary, thus, increases the profits.

Debtors and Creditors

If a large part of the business turnover is made up of credit sales, the broker would need to look closely at the age analysis of the debtors and the bad debt situation.

Bad debt is going to reflect on the present profitability of the business and a delay in debtors paying will affect the business’s cash flow and require further capital, for instance, more money tied up in the business.

Stock

There is always a debate on the stock issue. One argument is that because stock is an asset to the business and the buyer will recoup this investment, the price should be calculated and the stock added to it. The other, more generally accepted, argument is that stock is part of the total amount a buyer has to pay out and therefore he requires a return on his investment the same as the rest of the business.

Therefore, the price calculated using these methods would include the stock. Many sellers, especially in the retail business, accumulate large stock holdings because of the special deals wholesalers offer.

The only way to overcome this problem is to calculate what the average stock required to run the business is, and either the buyer is prepared to purchase this additional amount or the seller must have a stock sale.

Terms Available

Is the seller prepared to offer terms allowing a buyer to secure the business on a lower down payment and to pay the balance off from the profit the business makes? This would then make the business more accessible to a wider range of buyers, enabling the seller to achieve a higher price.

Availability of Funding

Some businesses are more aligned to be acceptable to third party or bank finance. These will typically include businesses with a strong asset value in the form of tangible assets such as vehicles, plant, and machinery. This type of assets can be used as security for a business loan.

Banks and financing houses tend to favour businesses with a solid debtor’s book. Typically, such a debtor’s book will be ceded to the bank or financing house in order to secure an overdraft facility. It is also a market trend that commercial banks are more willing to extend loans and business finance to franchise operations.

The mere fact that a portion of the acquisition of an existing business can be financed through a commercial bank or finance house means that pool of potential buyers for such a particular business will be larger. This greater demand for the business will have a positive influence on the perceived market value of the business.

Duration of Business Establishment

Businesses that have a longer track record are viewed as being more secure and should command a higher value than a newly established business.

Duration of Ownership

The longer a seller has owned the business the more reassured a buyer is and therefore more likely to pay a higher price.

External Factors

Often there are certain external factors that could affect the present valuation or even the continued viability of the business.

For instance:

1. A new shopping centre being built
2. A change in direction of roads
3. Talk on deregulation of petrol
4. Talk on allowing supermarkets to sell beer
5. Possible Union action
6. Perceived security risk – robberies, etc.