Here’s a common scenario owners face: they want to sell their niche business with an established history, a committed client base, and consistent growth. The owners know that being a niche business increases the value of their operation—but they also worry that their niche will narrow the number of companies interested in placing a bid. So how can they determine value? And how do they balance the value of being in a niche against the reality of having a limited pool of potential buyers?

Why Being in a Niche Adds Value

Being in a niche specialty almost inevitably adds value to a business. The narrower the niche, the higher the value. Value increases even more if there is little risk in the niche. A new and highly competitive niche business might not be worth much more because buyers are risk-averse. Conversely, an established business in a reliable industry is worth more. Other factors that add value to your niche business include:

• Few competitors, or being the strongest competitor in your geographic region
• Diverse revenue streams; relying on a single client increases risk
• Few areas of exposure
• Established operations, skilled management, and a committed staff
• A business that can run well without you. The more dependent a business is on their owner, the riskier it is for a buyer

Putting a Value on Your Niche Business

Valuing your business begins with a comparison to comparable businesses in a similar niche. What may help even more is getting the sage expertise of an experienced appraiser. It can be challenging to see your business through an objective lens. Owners tend to add value based on their emotions and the effort they’ve put into building the business. An M&A advisor can help you better understand your business’s value and offer expertise for increasing its selling price.

Whether or not you seek help, remember that buyers are looking to reap future economic benefits from the purchase. Too many people focus on GAAP accounting and business sheets. Instead, most valuation professionals look at the present value of future benefits by creating a discount rate—usually around 20-30%, depending on the business and the industry.

Questions to Ask About Value

A few questions can help you more accurately assess the value of the business. These queries may also point you toward strategies for increasing the value of your company. Those include:

• How many contracts do you have, how likely is it that they will be renewed, or will they continue into the future under a new owner?
• What happens if one or two clients upon whom you are highly dependent leaves?
• How many streams of revenue do you have? Is there a way to increase that figure?
• How do you create your projections?
• What is your strategy for revenue growth?
• When will you need new equipment, office space, or staff? Are you financially positioned to make these changes?

Not everything can be quantified in a multiple or a value and business value varies greatly depending on whom you ask. So the key is to find a buyer for whom your business is a good fit, whether it be a strategic buyer or private equity.