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Have you set your Business ‘Reserve’?

 

Having recently watched the final of ‘The Block All Stars’ you have to ask whether the reserves were set correctly.  Although the show is a competition with contestants taking any monies above the reserve as a prize, three out of the four contestants walked away with around $200,000 each whilst one group of contestants only achieved $25,000.  What went wrong with the house that only sold for $25,000 above reserve and would the price achieved be different if the reserve was set higher?

The same can be said when it comes time to sell your business.  How do you come to your ‘reserve’ and what if you’re leaving considerable monies on the table simply because you don’t realise the true value of your business.  In extreme cases business owners can misunderstand a buyer’s objective with a strategic buyer able to recognise potential leverage points thereby increasing the price they are prepared to pay.  If a business owner uses a lower ‘multiple’ they could be missing the opportunity to sell to someone who truly recognises their business’ value and is prepared to pay for it.

Most businesses are their owners largest asset and retirement plan, not many people would be happy with an agent selling their home or investment property for less than its current market value so why is it different with our business?  The answer is either to know and understand some basic valuation rules or find an advisor who does.

The basic principles of valuation are centred on risk vs. return.  What return can the business generate and how much risk does the business hold?  Spending time and effort driving the valuation of your business and these two factors will ultimately add value and reduce hands on management time required within the business.

 

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