Five Reasons you’re Burning Away Value and How to Put Out the Fire!
If you are thinking about selling your business your immediate questions might well be ‘How much is my business worth?’ and ‘How do I increase the value of my business?’. But one of the things we encourage our clients to consider is what might be holding the valuation down, and how this can be addressed before going to market.
Here are five of the most common causes of depressed valuation and how you can address this when it comes time to sell up.
Financial Irregularities
This is not talking about fraud, or seriously dodgy accounting practices – although if they are present you need to do something major about it quick! But even small discrepancies, inconsistencies or creativity can have a downward impact on value. This is because even honest mistakes create doubt in the mind of a buyer and increase the risk profile of the acquisition in their eyes.
The good news is that this is relatively easy to do something about. Giving adequate time and attention to the preparation stages of taking a business to market should allow you to identify any areas of concern. A third-party like Entrepreneurs Hub can help with this, after all an independent pair of eyes is always helpful when it comes to figures.
A Red-Tape Tangle
This could take the form of being behind on legislation changes, out of date paperwork, unsigned contracts, or just simply a bit of a disorganised filing system. It’s well worth taking the time to straighten things out, a perceived messy business will be worth less in a buyer’s eyes.
The more serious side to this is serious litigation against the business, not small payment disputes, but things that may have a lasting and damaging impact on the company or the brand. As with all of these issues, it needs to be addressed at the appropriate time – it doesn’t need to scupper a deal, but you must not try to hide it.
Diversity
You might be thinking that diversity is a good thing, and you are right of course, in most cases. But for diversity to really add value there needs to be a complementary link between the diverse elements. A common example is property. It’s not uncommon for a small business owner to also own a rental property or two, and not uncommon for those to be held within the business. However, when it comes to selling a business, these can be a complication that is ultimately detrimental to value. Anything like this should be extracted from the business as part of the preparation for sale.
Obsolete Technology
When buying a house, it’s not unusual to identify a few things that need updating, refreshing, redecorating, or completely ripping out and starting again. These are then often used as negotiating tools to drive down the price. In the same way business operating systems or technology that is obsolete, will drive down the valuation.
The negative impact on value will almost certainly be greater than the cost of upgrading systems, so if it is feasible to do so, it is worth ensuring that systems are brought up to date – or at least plans are in place to facilitate the upgrade.
Balancing On A Point
A former colleague of mine was very fond of the saying ‘you are balancing the business on a point’, usually accompanied by an appropriately triangular hand gesture. What he was referring to is quite common among small, and even some quite large businesses, in that a significant majority of their work comes from one source.
This has probably been quite good for your business up to now, but a buyer will see risk in this. What if the client doesn’t like the transition of ownership? Or more basically, what if the work simply tails off due to a change in strategy or the economy, or some other reason beyond your control?
As with everything in this list, it doesn’t make your business unsaleable, but it may limit the offers you will receive. If this is a concern you might want to consider investing in a sales drive to broaden your client base and reduce the perceived risk in the mind of a buyer.
So, in conclusion, it’s worth thinking about things that are dampening the potential value in your business as well as things that will increase value. You may find that some simple changes and preparation can significantly change the profile of offers you receive.
If you want to talk to someone about how to identify and address these issues, Contact Us – we’d be delighted to hear from you.
Similar Insights
FAQs – Selling Your Company
How do I sell my business in the UK?
Selling a business in the UK typically involves preparing financial information, obtaining a valuation, identifying suitable buyers and negotiating the terms of a sale. Most owners work with an M&A adviser to manage the process confidentially, approach qualified buyers and maximise the value achieved.
At Entrepreneurs Hub, we talk about five key areas that make the difference between success and failure when selling your business. Read more…
What is my business worth?
A business is typically valued by applying a multiple to its sustainable profit, often EBITDA or adjusted net profit. The appropriate multiple depends on factors including growth, recurring revenue, customer concentration, management strength, owner dependency, market conditions and buyer demand.
Determining what your business is worth involves more than applying a simple formula. Use our Business Valuation Calculator to obtain an initial valuation range, or read our simple business valuation guide to understand the factors buyers consider.
How long does it take to sell a business?
Selling a business in the UK typically takes around 12 to 18 months from initial preparation to completion, although some transactions may be quicker or take longer. The timeline depends on business readiness, buyer demand, deal complexity, due diligence and how quickly the legal terms can be agreed.
Preparing accurate financial information and organising key documents in advance can help reduce avoidable delays. Read our complete business sale timeline to understand what happens at each stage.
When is the best time to sell a business?
The best time to sell a business is usually when it is performing strongly, its future growth is clear and you are not under pressure to complete a sale. Buyers are generally more attracted to businesses with rising or stable profits, reliable financial information and credible opportunities for further growth.
Business owners are often in a stronger position when:
- Revenue and profits are growing or consistently strong
- Financial records are accurate and up to date
- Future growth opportunities can be clearly demonstrated
- The business is not overly dependent on the owner
- There is a capable management team in place
- The owner has started preparing well in advance
Market conditions can also affect buyer appetite and valuation. Factors such as sector growth, access to finance and competition between buyers may support stronger deal activity, but preparation and business performance are usually more important than trying to identify a perfect month to sell.
Ultimately, the best time to sell is when both you and the business are ready, and the company can demonstrate sustainable performance and future value to potential buyers.
Use our Exit Readiness Tool to assess how prepared your business is, or read our guide on when to sell your business for further guidance.
Do I need an adviser to sell my business?
You are not legally required to use an adviser to sell your business, but many owners appoint an experienced M&A adviser to help manage the process. An adviser can prepare the business for sale, identify and approach suitable buyers confidentially, coordinate negotiations and support the transaction through due diligence.
The right adviser can also help create competitive tension, protect your time and reduce the risk of avoidable mistakes. Read our guide to choosing the right business sale adviser to understand the different types of support available.
How do I prepare my business for sale?
Preparing a business for sale involves strengthening its financial performance, reducing risk and making sure it can operate successfully without heavy reliance on the owner. Buyers will also expect accurate financial records, clear contracts, organised documentation and evidence of future growth.
Preparation should ideally begin well before approaching the market, giving you time to address weaknesses that could affect value or delay the transaction. Use our Exit Readiness Tool to assess how prepared your business currently is.
How is confidentiality protected during a sale?
Confidentiality is protected through controlled information sharing, anonymised buyer approaches and non-disclosure agreements. Potential buyers usually receive limited information at the start of the process and must sign an NDA before commercially sensitive details are released.
Prospective buyers should be assessed before receiving further information, with documents shared gradually according to their level of interest and credibility. A well-managed process also allows the business owner to retain oversight of who is approached and what information is disclosed.
What documents do I need to sell my business?
The documents needed to sell a business commonly include financial accounts, management information, forecasts, customer and supplier contracts, employment records, tax information and evidence of intellectual property ownership.
Buyers may also request details of property, insurance, legal disputes, regulatory matters and company ownership. Organising this information before due diligence begins can reduce delays and help maintain buyer confidence. Our Business Sale Due Diligence Checklist explains the main information buyers are likely to request.
What’s the quickest way to sell a company?
Selling a business quickly is possible, but speed shouldn’t come at the expense of value or deal security Read more…
What’s the best way to sell a business online?
Yes, you absolutely can sell a business online. Many platforms specialise in connecting business sellers with buyers. Read more…
How can I increase the value of my business before selling?
You may be able to increase the value of your business by improving sustainable profits, developing recurring revenue and reducing reliance on individual customers or the owner. Buyers also value capable management teams, reliable financial reporting, scalable operations and clear opportunities for future growth.
The earlier you identify the factors affecting value, the more time you have to make meaningful improvements. Use our Business Valuation Calculator for an initial indication of value and our Exit Readiness Tool to identify areas that may need attention.