What is Your Business Worth?

As a business owner, you will likely want the highest price possible when selling your business.How do you maximize its value? 

A business is worth the present value of the future cash flows that arise from the business’ tangible and intangible assets. Tangible assets are the business’s physical assets, such as cash, inventory, equipment, and vehicles. Intangible assets refer to the non-physical assets of a company. These are often difficult to identify, but may include (among other items) a well-established:  

• reputation
• brand
• customer relationships
• network of supplier relationshipsproprietary technology or technical “know-how”

Although intangible assets, commonly called goodwill, cannot be seen or touched, they are often a business’ most valuable assets.

Goodwill can be split into two categories: commercial goodwill and personal goodwill. Commercial goodwill refers to the value that can be transferred to a buyer, whereas personal goodwill stems from an owner’s unique skillset, reputation, and/or personal relationships.

Personal goodwill is linked to you and not the business itself. It walks out the door with you, unpaid for, upon the sale of the business. Some questions to ask when evaluating whether personal goodwill exists in your business include:

• Do you personally maintain your business’s relationships with key customers and suppliers? 
• Is your business’s success tied to your personal reputation?
• Is your skillset or expertise such that it cannot be replicated or taught?
• Can your business function without you? If not, which areas would suffer? 

Personal goodwill is not a bad thing; it’s made you money. But a rational buyer will only pay for commercial goodwill. Therefore, to maximize sale proceeds, it is critical to “commercialize” as much personal goodwill as possible. Things that maximize business value include:

• Preparing your business a few years in advance of the sale.
• Transitioning key relationships to other members of the team.
• Formalizing relationships with contracts.
• Teaching your skills, transferring your knowledge, and sharing your expertise with team members.

Personal goodwill that is not transferred before a sale may require you to sign an employment agreement and stay with the business after the sale. Then, hopefully, if specified targets (likely outside of your control) are met, you will be paid for it. 

To help you transform your personal goodwill into commercial goodwill we encourage you to consult a trusted Crowe MacKay Chartered Business Valuator. It will take time, planning, and effort, but the sooner you begin, the more you will accomplish.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.

If you are looking for Valuation services from individuals with decades of expertise, our team at Crowe MacKay has performed hundreds of valuations across a diversity of industries. We pride ourselves on providing clear reports and understandable advice no matter the complexity of the engagement.