Valuation can make or break the sale of your business. If your company is overvalued, it won't capture the attention of serious buyers and can languish in the marketplace for years. But undervaluation can be just as problematic. Although your business will sell more quickly, it may also mean sacrificing the financial objectives you hope to accomplish from the sale.
In the business-for-sale marketplace, overvaluation happens more frequently than undervaluation. For years, the seller has worked hard to build the company's reputation in the community, so when it's time to sell the business the intangible value of the company's reputation should be factored into the sale price, right?
The value of a company's relationships with customers, employees, suppliers and other stakeholders is called goodwill--and it does have real value for buyers. But to realize that value in the final sale price, business sellers need to execute strategies designed to convert goodwill to demonstrated business value.
How to Demonstrate the Value of Goodwill
As a small business owner, it's in your best interest to start making a case for the goodwill value of your company as early as possible. The more time and energy you invest in creating tangible measurements of your company's relationships, the easier it will be to demonstrate its goodwill value to prospective buyers.
With adequate planning, it's possible to increase your company's sale price by strategically documenting foundational elements of goodwill value.
1. Measure customer loyalty.
Customer loyalty is a reflection of your company's relationships in the local community. Although most business owners recognize the importance of loyalty improvements, relatively few owners establish loyalty goals and document the achievement of loyalty milestones for buyers.
2. Document customer service outcomes.
Businesses with strong customer service programs can benefit from positive word-of-mouth, advocacy on social media sites and other advantages. In addition to archiving positive customer comments and customer service interactions, create mechanisms to measure the effectiveness of your customer service efforts (e.g. average response time improvements, customer survey results, etc.).
3. Prioritize employee retention and development.
Employee relationships play an important role in determining the goodwill value of a small business. Buyers are willing to pay more for stable companies that can demonstrate above average employee retention rates and organized employee development programs.
4. Differentiate your products and brand.
Businesses that offer a unique product or service have a tendency to pique buyers' interest. By differentiating your business from other local providers, you can significantly improve its goodwill value--especially if you can demonstrate that customers perceive your business as the community's sole provider an in-demand product or service offering.
5. Benchmark everything.
Benchmarking is the key to demonstrating the cash value of goodwill. Sellers that make the biggest impact with buyers in the business-for-sale marketplace gauge loyalty, retention and other measurements against industry and regional benchmarks to quantify the company's intangible value.
Most small businesses have at least some goodwill value that can be converted into cash value during a business sale. However, the quantification of goodwill can be nuanced, so it's advisable to consult a business valuation professional before you assign actual dollar figures to the value of your company's relationships with customers, employees and other stakeholders.