Selling Specific Business Types

Selling a Service Business

Service businesses are great to own. They can be highly profitable and don't require much capital investment. So why is it sometimes tough to sell a service business?

For many owners, a business represents more than a livelihood.

It also represents a nest egg, an asset they will someday convert into the cash they need to retire or launch their next big business venture. But for owners of service businesses, their nest egg comes with strings attached.

The truth is that selling a service business can be a lot more difficult than selling a retail or manufacturing business. The problem is that unlike other businesses, service businesses don't have many tangible assets. So instead of buying equipment or inventory, prospective buyers are really buying a business model that they may or may not be capable of re-creating on their own.

If you own a service business, there are several things you can do to make your company more attractive to buyers. Although strategies vary, the point is to present a business package that buyers can't replicate by launching a startup. Here are some tips to maximize value when it's finally time to put your service business on the market.

  • Income stream valuation. There are multiple valuation methods that are used to establish asking price in a business sale. Since service companies don't have many assets, valuation should be based on the business's historical income stream, profitability, and other revenue-related factors. Consult your broker or a professional business appraiser for an accurate valuation.
  • Professional expertise. Many service business models are based on the professional expertise of a single person, i.e. the owner. When the owner exits the business, the company's primary selling feature disappears, leaving the business practically worthless to buyers. To insulate your business, consider either expanding your business to include several professional employees who will remain with the company after the sale or agree to stay on as an employee yourself.
  • Client base. Your client base is an inherently valuable asset. If buyers have a reasonable expectation that the current client base will survive an ownership transition, it will be reflected in the purchase offer. Since savvy buyers require sellers to sign a no-compete clause, it's in the seller's best interest to secure client contracts before selling the business.
  • Market positioning. Common sense says that a service business with a high market share is more valuable than one that is struggling to gain a foothold. Given the other complexities involved with selling a service business, it's worthwhile to capture as much of the market as possible during the years leading up to the sale, even in if it means expanding your existing labor force.
  • Employee retention. For many service business sales, the company's real value boils down the number of professional employees who will remain with the business after the transition. Make every effort to create and retain a high quality workforce that is committed to both the business and your clients.

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