Recently, this seems to be the number one question I receive from aging business owners that have begun to contemplate what to do next with their business. Business owners are beginning to realize they cannot work forever and are looking for options to liquidate their investment. So, what’s their business worth?
What are a business owner’s options?
Typical options include:
- Sell the company to the next generation
- Gift shares in the company to the next generation
- Sell the company to an employee
- A combination of 1, 2 and 3
- Sell the company to a competitor
- Contact a business broker to list the company and begin to take offers.
Key value drivers
Each option has its pros and cons, which I will not describe here, but it is a good idea to begin with an understanding of the key value drivers of your company in order to understand what your business is worth.
Think of key value drivers as important components of your company. Some key value drivers are market based such as:
- Revenue growth
- Market share
- Market potential
Other key value drivers are enterprise based such as:
- Work force-in-place
- Customer base
- Management team
- Stickiness of the company’s revenue (i.e. recurring revenue)
Key value drivers lead to value because value drivers assist investors in their assessment of risk and, all else being equal, lower risk companies will receive a higher valuation and vice versa. A solid understanding of your company’s value drivers will assist you in understanding the value of your company to the market.
Lastly, regarding actual transaction structures, I mostly witness sales to existing stakeholders in a stock sale structure (i.e. to the next generation) and sales to third-party buyers in an asset sale structure. Taxes and corporate liability are the two main reasons for this.
MiKe Metzler, CPA, ABV, CMA, CGMA, ASA