Sellability Score: Your Business Valuation Guide
Whether you are looking to sell your business soon or in twenty years, knowing its sellability score can help you maximize its value and exit with the best return on your investment.
But what's the sellability score, and why does it matter to you? Let's find out what the score means and the strategies to boost the metric as you prepare for the grand exit.
When the right time comes for the exit, you can work with us at Exitwise to recruit your dream M&A team of business brokers, wealth advisors, tax accountants, and business attorneys.
Besides helping you understand your sellability score report, these experts can smoothen the process of selling your business.
Talk to our M&A advisor today about forming the best M&A team to maximize your exit.
What is a Sellability Score?
The sellability score is a numeric rating that shows a business owner how hard or easy it is to sell their business based on its potential value and attractiveness to prospective buyers.
The score was developed by John Warrillow, a best-selling business author and the host of the Built to Sell Radio podcasts, as part of the ValueBuilder System.
Also called the Warrillow Sellability Scale, the score rates your business between 1 and 100 after you complete an online survey.
Besides getting an instant sellability score for free, you also get a detailed 26-page report with graphs and charts showing you how potential acquirers evaluate your business.
Here's what the report shows alongside the score:
Detailed instructions on how to interpret the sellability results
Whether your company is easy or hard to sell
Tips on how to increase the sellability of your business
Detailed descriptions of the eight key components of an easy-to-sell company and why they are important.
Why Knowing Your Sellability Score Matters?
As a business owner with an exit in mind someday, you'll want to know the marketability of your business for the following reasons:
You'll Spot Areas for Improvement
The detailed report shows you where to improve your company to make it more attractive to potential acquirers. These improvements can come from within your company or based on industry standards you are yet to meet.
The added value places your business in a better position for future success, which attracts new buyers and increases the chances of getting a higher purchase price.
You'll Always be Ready to Sell
Keeping tabs on your business’s sellability rating can help you to always focus on exit planning, even as you run the business. You never know when you might receive an unsolicited offer or need to sell your company for some reason. You'll want to be ready when the time comes.
You'll Understand Your Net Worth Better
The score helps clarify your net worth, which should be fairly separated from your business.
If most of your net worth is tied to your company and you don't know how much it's worth, then your net worth is unclear. Getting your company's financial health report will shed light on your own financial health.
Helps You Set Realistic Expectations
Knowing your business’s sellability scale helps you realistically understand its potential value so you can negotiate confidently during the sale process. You don't want to overprice the business and scare away potential investors.
8 Components of the Sellability Score
To determine the sellability score of your business, the online survey you fill out considers eight elements, as discussed below:
1. Financial Performance
The sellability score algorithm measures your financial health using your financial history based on how you generate revenue and profits. It also considers how professionally and consistently you prepare your books.
Most buyers consider your business’s financial performance and health first, so you must always have accurate financial records to increase their confidence in the business's ability to offer them good returns on their investment.
2. Growth Potential
Prospective business buyers can easily see how much growth potential your business has based on its financials. Can your business expand into new geographical markets? Can you add more customers from the existing markets?
Most buyers want to see the rate of growth they could expect from your business through regular efforts without over-investing their resources immediately.
3. Competitive Advantage or Monopoly Control
Every buyer you find wants to know how well your company differentiates itself from its competitors.
A greater advantage means you can organically set the standards or define the industry's rules, making your business more valuable to buyers.
4. Valuation Teeter-Totter
It's important to show potential buyers that your business can finance its operations and growth from its own cash flow with little to no need for external finances.
Buyers are willing to pay more for companies that rely less on outside finances and less for those that cannot afford to borrow.
5. Customer Satisfaction
You'll want your customers to be happy with your goods and services to the point that they can gladly refer you to other potential customers.
Happy customers can bring in more recurring income, raising the attractiveness of your business to buyers.
6. Switzerland Structure
Based on the Swiss notion of self-sufficiency and neutrality, this element refers to diversifying options and reducing dependency on a singular vendor, employee, or customer.
Such dependency puts you at risk if a stakeholder pulls out, making your business less desirable to buyers.
7. Recurring Revenue
If you have lots of recurring revenue from long-term contracts or subscriptions, buyers will like your business more because they are guaranteed some income if all other factors remain constant.
8. Hub and Spoke
It's risky if your business depends heavily on you to run successfully. Buyers want to see businesses that can perform well even if the owner was incapacitated for a long time.
To mitigate this risk, ensure you have turnkey employees who can increase the confidence of prospective buyers.
How is the Sellability Score Calculated?
The sellability score is calculated using an algorithm that considers several variables regarding your business’s financial, market, and operational conditions.
To determine the score, the algorithm assesses your business thoroughly based on your responses to the online survey or questionnaire for the eight components above.
Additionally, the algorithm also considers your business's unique characteristics to ensure the resulting score and report are better suited to your specific situation.
How to Improve Your Sellability Score
Here's how to improve the sellability rating of your business:
Address Your Business's Weaknesses: The sellability score helps you learn weaknesses that may silently kill your company and how to correct them. For example, you can cut back on unnecessary expenditures if you are short on finances.
Diversify Your Customer Base: By onboarding more customers from diverse areas, you can become more self-sufficient, increase your revenues, and reduce the risk of a fallout if certain customers pull away.
Boost Your Cash Flows: You'll want to increase and hasten your receivables while reducing and stretching your payables to ensure you can fund your business operations and growth from cash rather than borrowed finances.
Increase Recurring Revenues: Look for repeat customers and subscription models to increase your monthly recurring revenues and guarantee potential acquirers a reliable income after they buy your business.
Remove Yourself a Bit: Ensure your company can run successfully without your daily input. You'll have to raise a team of turnkey executives and employees to whom you can delegate important decisions and business operations. However, you must ensure the business won't be too dependent on one or a few employees.
At Exitwise, we can help you hire and manage the best industry-specific team of M&A experts to ensure you increase the value of your business and sell at the most favorable price. Consult with our M&A advisor today.
Frequently Asked Questions (FAQs)
Let's check out some questions regarding business sellability scores:
What is the Ideal Sellability Score?
An approximate 80% sellability score is ideal as it shows your business is highly attractive and easy to sell to prospective buyers at a higher purchase price.
How Often Should I Assess My Sellability Score?
Assessing your sellability score should be a continuous process because improving sellability takes months or years.
If you plan on exiting your business in a few years, you can assess the score every month. Business owners looking to exit in five years or more can evaluate their score after every 3-4 months.
Are There Industries with Naturally Higher Sellability Scores?
Yes. Industries such as pharmaceuticals, technology, healthcare, and capital-intensive manufacturing naturally have higher sellability scores.
Conclusion
You shouldn’t determine your business's sellability score only when you want to sell your company immediately. It's advisable to keep tabs on the score all the time once you have your eyes set on a successful exit in the coming years or decades.
However, if you want to exit your business sooner, you can hire an M&A team to not only help you determine and understand your sellability score but also sell your business successfully.
Reach out to us at Exitwise to create the successful exit you deserve with an M&A team we’ll help you hire and manage.
