Last month, we hit on 5 areas that drive higher business valuations. Below, you’ll see some of the areas that lower business valuations. If you’re considering the sale of your business, it’s important to understand what affects valuation so you can bring the most valuable company to market.
Value Dingers: These areas often result in lower valuation from buyers due to the higher level of risk. If you are considering a sale in the next few years, work to minimize these value dingers in your business before going to market.
1. Customer concentration. A business with any one customer generating more than 10% of total revenue is riskier than one with a diversified customer base. Customer concentration from 10-30% can often be rationalized, but anything over 50% severely limits your buyer pool.
2. Commodity product/service. If your core business is built around a commodity product or service, you need to have an angle to make it attractive to the average buyer. Do you have a lower cost structure than your competitors? Do you win on price point, volume of sales, market segment or unique location? Find a way to distinguish your business from your competitors and create a solid, recurring customer base.
3. Too many addbacks. If you run a ton of personal expenses through the company, buyers often don’t give full credit for a significant level of add-backs. It is normal for all businesses to have one-time, non-recurring or personal items that buyers give credit for, but if 75% of your cash flow is personal add-backs, buyers have a hard time getting comfortable. (i.e. you, your spouse and kids have cars, cell phones, travel expenses, etc. run through the business)
4. High CAPEX requirements. Does your business require significant annual capital expenditure? Higher CAPEX businesses tend to elicit less interest from the buyer pool because of the continuous requirement to upgrade expensive equipment.
5. Seasonality. Does your company have peaks and valleys in revenue stream over the course of a year? The more steady and consistent your revenue, the more appealing your company is to more buyers. If you have a business that is booming in the summer, consider adding complementary product lines or services in the winter months to lessen the seasonality of the business.
If you can limit value dingers and maximize value drivers, your company will be set up for success and will attract a larger buyer pool when it’s time to sell.