The Secret: The value for a business is the amount agreed to by a willing buyer and a willing seller, for which both parties are  mutually uncomfortable.  I love this definition!  My husband created the “mutually uncomfortable” thing, and I agree.  It means neither party thinks he/she got “taken,” and neither party thinks he “stole” the thing.  Both parties feel a little uncomfortable (I think I sold my business for just a little too little; he thinks he bought it for a little too much.) In other words, the value of a business is what the parties think it is.

Valuation Drivers. A recent Forbes article discussed the valuation of a flower shop and mentioned the key valuation drivers:

Location and Facilities: For local businesses, a location that draws customers and facilities that look fresh and inviting are important.  Not so much for online businesses, although you could call the look of a web site “location.”

Reputation: Otherwise known as “goodwill,” reputation is the key driver of valuation.  Goodwill can be measured in some businesses which have a continuing clientele, but it is difficult to measure goodwill in a flower shop or other retail business that has no way to track repeat customers.  One possibility is to check customer reviews on  Yelp.com.or other online rating site.

The true value of a business depends on the skill of the negotiators and the willingness of both parties to see the deal through to completion.  Sure there are some “rules of thumb” for such things, but each situation is different. For more information, see my About.com article on Valuing Your Business for Sale or get a copy of Business Valuation for Dummies.

Image: popaver@flickr

Post from: EveryJoe

The Secret to Valuing a Small Business

Case in Point: I recently worked with a friend who has a cleaning business.  Her health is declining and she wanted to sell her business quickly.  I advised her on how to make the transition smooth to keep as many of her clients as possible.

Why is the transition important? In the sale of a small business, the primary asset being sold is the customer base, the client or patient list. Preserving the value of that valuable property is vital to the success of the new business, not only to the buyer, but also the seller.  Today’s business sales often involve seller financing, so if you are the seller you want to be sure your buyer is going to be able to keep the customers and, consequently, the income, so you can get paid.

How do you keep mutiny to a minimum? You both want to maintain the customer base through the transition and after.  Here are some tips to keeping customers happy and on board:

• It’s about them, not you. Your primary goal is to keep the customers happy.  This might mean spending time and energy you would rather spend in doing other things.  But keep them happy anyway.
• Let them know soon. It’s always difficult to know whether to tell the customers sooner rather than later, but unless there is some overriding reason not to say anything, it’s best to let them know as soon as you can.  People appreciate being told what’s going on.  In the case of the cleaning service, the owner was reluctant to tell people, but when she did, she found that they were interested, helpful, and willing to stay on.
• Introduce the new owner. If you are the seller, be sure to contact each customer in person, if possible, to talk about the transition and introduce the new owner. Express confidence in the new person’s ability to keep things going at the same high level of service.
• Make your contacts with customers personal. If you can’t contact them in person, call. Don’t just send an email or a letter.
• Listen to customer concerns. People don’t like change, and they will ask lots of questions, like, “Will the new owner raise prices?” “Will we continue to get our orders on time?” “Will you keep the same name?” and similar questions.  If the new owner plans on raising prices right away, of course you can’t lie.  But the responses from your customers will give you an indication of how receptive they will be to the new person and to changes.
• Spend some time together. My cleaning service friend and the new owner spent several weeks going to clients and cleaning together.  People got used to seeing the new person, so when the owner left, the transition was almost unnoticed.

The more information and assurance you can give to customers during a transition, the more likely they will be to stay on board.  And the new owner will find smooth sailing in the new business.

Image: Newscom

Post from: EveryJoe

Keep Customers on Board in a Business Sale