When looking to sell my company, how can I determine its value if it's service based and has no subscription model?

As the owner of an Indian-based web and mobile development firm that has recently been going through the sale process, as well as an American cloud-based company we sold, I know what information you are looking for.

It's great that you are planning ahead 3-4 years. That's a great start. The best way to maximize the valuation of your company during the sale is to generate recurring revenue leading to sustainable profits in the 20%+ range. You should examine ways to generate recurring revenue from your clients and not depend solely on their returning for a rebuild years after the initial engagement. Consider a support package, or some value-added services on a subscription basis such as SEO, technical support, server management, etc. If your firm doesn't have those skills, you should consider partnering with another firm who can offer them under your brand. I suggest finding an offshore firm with a long track record and a commitment to service quality whose services you can mark up an additional 50% or so and resell. These relationships become critical to the sale process as well, so it's important to get started early and find the right partner.

There are no default ways to value your company, though there are a few accepted valuation methods. It will be largely up to you, as the business seller, to make and negotiate your position and shop around for different buyers. What I can tell you for certain is that you will be in a weak position if you don't get recurring revenue in place. Even moderate recurring revenue can generate 2x returns on your valuation. You should have at least 2 years of solid growth in these revenue channels before you approach buyers.

If you want, we can schedule a quick 15-30 minute call to lay out a strategy for getting the right price for you business.

Best!
Marc

Hi, your question is right up my alley...I'm a business growth and business valuation expert. I often position clients to exit their businesses for a variety of reasons. Please allow me to give you some simple, informative tips.

Your best approach is planning...planning applied to good operational and financial performance driven by a good growth plan over the next 3-5 years leading up to your sale.

Specifics are many and complex, but the formula is simple: 3-5 years from now, your future potential buyer will look at your revenue/cash flow growth (for the past 3 years) and your future projections (reasonable projections) to determine your value...at that time. You'll need to show them a great picture of the past and the future when you do!

So here's what you can do today to give create this great picture:
Do a valuation now. Be sure it includes a projected valuation for each of the next 3-5 years. This projected valuation will be based upon financial/operational projection(s). This means your future valuation is stated, provided you achieve these projections.

Projections are all about forecasting all/each department activities and the resulting company wide financial statements which reflect the financial performance of these projected activities.

In your valuation projections, be reasonable, but do some reaching at the same time. Don't over reach, but reach for reality here! Then use this projection as a financial/operational roadmap to set company targets and plans for the next 3-5 years. This means setting key, detailed marketing, sales, service and other targets that if reached, means you are achieving your plan and consequently, your future valuation. This may also mean setting events on a company calendar which support this plan. Include your company leaders in the planning if you are a collaborative leader. When complete, give the targets to your company leaders, set their expectations to meet these targets, then support them well to do it. Give them their place in the plan, their instructions, give them incentives for reaching targets if necessary, and then work the plan as a team so you can grow into the forecasted valuation. Feel free to have some alternative projections which allow you room to either fall short on some planned goals or exceed others. Be sure these alternative projections give you known valuations in advance. This will give you room for flexibility should conditions change (hint, they often do, and can be for the better!)

I hope this helps. I'm available if you need more...this can be a complex topic, so I encourage you to explore it carefully before doing it.

Rodger Stephens, CPA, CGMA
Prize Performance LLC
Business Performance Expert

It's tempting to just look at the answer from your perspective. It's better to broaden the picture. Who is your buyer? What are they willing to pay? Is the business attractive to a buyer? If a buyer comes along and they need finance, are you willing to provide seller finance? A business sells because there is a motivated seller who meets a motivated buyer and both parties know all the details about the transaction. The sale may include a lease transferring to the buyer, the buyer getting a third party loan such as an SBA loan which the lender completely controls. This is what I do. I help a motivated seller by valuing and then selling their businesses to a motivated buyer and I make sure everything is fully and completely disclosed so all parties are protected. I also assist the buyer getting an SBA loan if that is part of their need. Additionally and just as importantly, I protect the business by handling everything confidentially. If the business has employees, suppliers or vendors that it does business and it has customers, its important none of these know the business is for sale or it can damage the value of the business. In this model I've just described, the value of the business is a function of its gross revenue and SDE or Sellers Discretionary Earnings. If you'd like to chat I am happy to explain more. Thanks.

It's not necessary to have a recurring revenue stream to get a good price for the business, but it helps.

If you want to sell in 3-4 years, my top tips are:

1. Ensure you show regular growth over this period as buyers are going to project that performance into the future and value your business based on that. Hit a plateau and buyers will project flat earnings going forward, they won't believe any projections involving a sudden jump in growth post-sale!

2. If you show little profit in your accounts you pay less tax but that will damage your sale price. An additional $100K in profit on the books could result in half a million more at the time of sale (assuming a multiple of 5) but will cost you a fraction of that in tax.

3. Get size. For buyers there's security in size. Security = lower perceived risk. Lower risk = higher price.

4. Have a good management team in place and make sure the business is not dependent on you ...or on any one or two key people as that severely damages price. (You could research "key person discount").

5. Have a good accounting package and demonstrate not only that you're on top of your accounts but also that you understand and have easy access to key "management accounts" information and intelligence.

6. Keep good records - from employee contracts to online services you're signed up for. Keep copies of contracts, emails, website traffic logs, everything.

7. Create manuals to document your procedures, processes etc. And keep updating them. Buyers really like to see good documentation of business knowledge and operations.

8. Run the business separate to your personal finances. For example, avoid signing personal guarantees on business debts where possible.

9. Hire a good adviser to assist with the sale ... and hire them early. It's never too early.

10 It's worth investing the time to find the right expert / firm as there are many charlatans about. Once you've found the right person/people, pay them well and keep them close. Good advisers can add enormous value i.e. many, many multiples of the fees you pay them.

The value of your company is usually determined by multiplying your revenue (the multiple depends on the industry). You might also take into account other factors such as assets owned. Since, you haven’t provided this info it’s impossible to answer a specific sale number you could achieve.

To maximise your particular business, I would try to introduce monthly retainer services (or subscriptions as you call them) with as many clients as possible. A website maintenance service for example or a complimentary service such as SEO or social media. If you have X number of clients paying you X per month, it’s much easier to work out a value for your agency.

As you’ve probably guessed already, it’s difficult to measure the worth of an agency if all the work is one off projects that come into the agency randomly.

For a limited time I’m offering free advice for 20mins.
VIP link: https://clarity.fm/robstephens/scale323

Rob Stephens
robstephens.com