You have decided to sell your business or are in the process of doing so. To get the most out of a sale, you will need to determine the value of your business. How do you determine it?

Looking to sell your business? You're not the only one: recently it became clear that more and more SMEs are considering it. In practice, we find that many entrepreneurs overestimate the value of their business. Based on turnover and the number of customers, they often think they have a reasonable estimate, but it is not always realistic. Of course turnover is important, but there are a lot of other facets that play an important role. That's why two companies with the same turnover are usually not worth the same amount.

Have company value determined

Determining the value of your own business is complicated. Often you do not have an objective picture of the market you are in. Or there are specific aspects of your industry that you overlook. It never hurts to have someone advise you on this. An expert usually gives you more on the bottom line than he or she costs.

Making your own assessment

Still want to make an estimate? Then include the following aspects in determining the value. All aspects are discussed below the table.

1 Market position in the industry

To some extent this is subjective, as entrepreneurs often overestimate their market position. An IT company with a turnover of 3 million euros has a small market position in its sector, but a strong market position in the Eastern Netherlands. It seems worth a lot then, but it is disappointing.

2 Qualities of management

What is the value of the managers who remain? Think in terms of both substance and breadth. Do not count the management skills of the selling owners, unless they expect to remain associated with the company for another 2 years.

3 Sellers' intentions to stay connected

Will you stay connected to the company (for now)? If so, that is a big plus. It ensures continuity and gives the buyer confidence that not all knowledge will walk out the door after acquisition.

4 Survival chances in the event of no sales

Does the company have future prospects on its own? Or is it entering a declining market and has no reason to exist on its own? The latter occurred, for example, with the famous "Kodak roll of film" business model. A company that can present plans that ensure future-proofing have a higher value.

5 Dependence on large customers or large orders

A company dependent on a few large customers is worth less. Indeed, losing such a customer poses a risk. Any customer that represents more than 20 percent of revenue lowers the value. Large orders or contracts that generate more than 10 percent of revenue also lower the value.

6 Financial reporting in line with the industry

Companies where the accounts are kept correctly have a higher value. IT companies, which work a lot with long-term contracts for licenses, run into this sometimes. The contracts are paid annually in advance, but not distributed and allocated on a monthly basis. Moreover, in the balance sheet, under the item "current liabilities" there should be a provision for the part that has not yet been performed.

When this is not done, a buyer may estimate net worth lower, which can lead to unpleasant surprises.

7 Current annual reports that are up-to-date

It's a tricky one: small businesses have no legal obligation to disclose detailed disclosures. Still, buyers will appreciate it if you can provide financial statements approved by an auditor. The more current, the better.

8 Consistent representation of historical and forecast growth

The past provides a guide for estimating how well you have run the business. A company that has consistently presented good profit figures is valued higher. In addition, it is important to a buyer whether the forecast for the future is realistic. From the historical and previously predicted profits, one can tell whether such a forecast was close to the actual profits. Your forecast for the future is then more reliable.

9 Strength of the order book

Companies with long-term contracts have a higher value. For example, IT companies with contracts for licenses lasting more than a year will fetch more than those with shorter contracts. The value is further increased if the contracts are renewed every year. In the case of IT, it happens regularly that the contract is extended one year after each contract year. Contracts thus continue for three years each time. This is interesting for a buyer: long-term contracts provide a secure source of income. This makes the payback capacity predictable, and a buyer is willing to pay extra for that.

10 Future trading

Are you expecting business in the coming year? That's great because it increases the value of your business. It indicates that management is still working to grow the business.

11 Strong earnings before taxes (EBITDA) and improved profit margins

It sounds logical: the greater the pre-tax profit, the higher the valuation. Yet a company with low profits can still be worth more. For example, if profit margins have improved in recent years. In general, a pre-tax profit of less than 5 percent of sales is worrisome for value. But companies that have managed to increase profit margins from 3 to 5 percent again have better future prospects, and thus higher value.

For smaller companies, they should die to a pre-tax profit of about 15 percent.

12 Smooth transition

What are your plans after selling your business? Do you still want to get involved in business strategy? That's not a good idea. If the buyer gets the impression that you can't let go, they will want to pay less. Also, starting up competing activities lowers the value of your current business.

13 Deal structure

The best structure is a simple equity structure, but that is not always possible. Sometimes there are outside investors or "business angels" involved in the business. A buyer always wants to be able to quickly get rid of participating minority shareholders who may hinder or even block a possible deal. Consider also, for example, required approval decisions from investors, employees or, for example, joint venture partners.

14 Benchmark

How does the company perform relative to competitors in the same industry? List public (financial) reports from the industry, or provide industry-specific information and financial key figures.

Need help determining the value of your business? Ask us. The initial phone consultation is free of charge.