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Pricing factors to consider when selling a business

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When selling a business you need to consider a range of internal and external factors in order to arrive at an accurate price. Clearly, you want to attract interested parties without delay so the business doesn’t lose value due to extended time on the market, so which pricing factors might come into play at this time?

Business reputation

Business reputation is an important factor when selling a business. A good reputation in the market can boost its value, and allow incoming owners to reap the rewards of the trust that you’ve built up from stakeholders and the wider community.

Are revenues reliable?

Operating with reliable, predictable revenue streams derived from long-term contractual arrangements with customers and suppliers, offers confidence to prospective buyers that the business is stable.

Diversified income streams are preferable to serving only one or two high value customers. Diversification avoids the negative impact on turnover that can occur when one customer takes their business away.

Also consider whether the contracts in place include a clause allowing for their transfer to new ownership on a business sale.

 
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Ownership of intellectual property

The value of owning intellectual property, such as databases, trademarks, and patents, can often be overlooked in a business sale, but typically adds considerable value. You need to consider whether your IP is registered where appropriate, and that paperwork demonstrating proof of ownership is up-to-date.

Protecting intellectual property is an important factor when selling a business – it offers reassurance to buyers that it can continue to operate unchallenged. Additionally, if a piece of intellectual property provides a unique selling point – proprietary software, for example - that this value won’t be lost.

Accounting records

The business’ accounting records should support the financial claims made in your sales particulars, and will be used by a potential buyer during the due diligence phase to assess your business’ growth potential.

Being able to access detailed, accurate, and reliable management information helps to portray the business as a financially healthy and worthy prospect, and that its reporting obligations to HMRC are fully met - a key factor, both during due diligence and also following the business sale.

Growth potential

A fully developed strategic plan for future growth is an important factor when selling a business. Anyone interested in purchasing will be looking to the future, and for reassurance that their investment has the potential to bring the return they expect.

Scalability is an important issue in this respect – could business processes be automated in the future without reducing quality, for instance? This would enable a new owner to further streamline the business, and provide greater agility in the market.

Cash reserves

If your business is holding cash reserves, whether for future investment purposes or as a source of emergency working capital, it presents the business as a robust and somewhat future-proofed entity. Along with any strategic planning documents available, this is a strong factor in your favour when selling.

Reliance on the business owner

If a business relies too heavily on the owner, rather than on a senior management team or other key figures, it can appear less attractive to potential buyers. It’s advisable for business owners to delegate some decision making to other qualified members of staff, to reduce concern that the business won’t function to the same high standards following its sale.

Competition

Understanding and responding positively to competitors can help you develop a competitive advantage. This might include using alternative distribution channels, for example, or exploiting gaps in rivals’ customer service delivery.

Industry

If your business operates in a steady industry, a buyer’s perceived investment risk will be lower, and they gain the advantage of current and future stability.

Circumstances of the sale

A sale is likely to achieve a higher price when it’s voluntary rather than forced - due to ill-health for example, and where there are no specific reasons for an urgent sale. You may be retiring, or perhaps the business has simply served its purpose and you’re looking for a new challenge.

Explaining current and expected industry trends will help potential buyers to make a decision if their practical experience in the industry is limited. It’s always advisable to seek professional assistance when undertaking such a significant transaction, however.

Third party negotiators/experts provide a degree of separation from the intensity of negotiations, and can offer sound advice on the factors that affect pricing for a business sale.


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