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Three Reasons a Buyer Might Pay More for Your Business Before you decide to put your business up on the block, make sure you fully understand how much what you're offering is worth to buyers.

By Sam Hogg

Opinions expressed by Entrepreneur contributors are their own.

The Value-Creation EquationthA friend approached me recently about selling his manufacturer's rep company. He has done well being a middleman between a dozen buyers and suppliers in the automotive sector. Though the business is real (with revenue, expenses, etc.), we're perplexed about how to sell it. All he would be selling is himself and his relationships.

There are lots of successful businesses that can't be transitioned with a sale. Building startups with the goal of an exit means knowing what you have to offer and what it is worth to a potential acquirer. There are many motivations for businesses to acquire others, but most boil down to the following:

Money. Cash opportunity drives purchase decisions, but it is not enough on its own. Buyers look for recurring revenue, or revenue that will occur with high predictability. Things like subscriptions or long-term contracts are good indicators of recurring revenue. A quick way to value what your recurring cash streams are worth is to divide them by the rate of an investment of comparable risk. If your company can put $50,000 in the bank every year with total predictability and the going rate of return for a similarly predictable investment is 5 percent, that cash stream is worth roughly $1,000,000, or $50,000 divided by 5 percent.

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