Don’t Leave Your Business Valuation to a Best Guess
What is your company worth? Every business owner has pondered it, whether they’re looking to move onto another venture, planning retirement, or just daydreaming about future years (or decades). Some owners have already arrived at a number — one that rewards hard work and entrepreneurship and promises long-term financial security.
And that number is usually a best guess: Sometimes too high, sometimes too low. It’s easy to get misled by past offers, theories from friends, or rumors about what a competitor may have sold for. You don’t want to undervalue your business, but you also don’t want to spend time and energy chasing a lofty valuation that isn’t realistic.
Where to Start
It’s smart to get a reasonable idea of your company’s value to help you make decisions about the future. Here are some things to keep in mind:
It’s not personal. If you’ve spent a lifetime building your company, you’re probably biased about its value. While your business may mean everything to you, a potential buyer is simply looking for return.
Buyers want earnings and cash flow, low risk, and high reward. Getting a handle on the hard numbers will better prepare you for strategic next steps.
Who’s buying? The idea that “beauty is in the eye of the beholder” is true for businesses, too. Your company’s value depends on the buyer.
For example, a “strategic” buyer—one who would get specific synergies from your company, such as an expanded market footprint, complementary technology, or economies of scale—would pay more than a buyer with less at stake.
What are you selling? In addition to cash flow, every business has value drivers that point to the health of the company, reduce or increase risk, and make it more or less valuable. These drivers include a diverse customer base, a strong management team, and a reliable supply chain. In addition, your company’s reputation and culture can affect potential customer relationships.
Setting your company apart makes your business more appealing to buyers.
Valuation or calculation? The type of valuation service you need depends on the purpose of the assessment. Court cases and tax filings require full valuations. For example, owners often get valuations for litigation, including divorce or shareholder disputes; tax-related issues, including bankruptcy or gift and estate planning; or preparation for sale of the company.
However, a less rigorous and less expensive service—a calculation—is useful in other circumstances.
In a calculation, the analyst and the client agree on the valuation methods and approaches to be used and the extent of the procedures. A calculation engagement results in a “calculation of value,” whereas a full valuation results in a “conclusion of value.”
You can use a calculation if you are considering retirement or sale, if you want to vet an unsolicited offer for the company, or if you need a periodic review for your buy-sell agreement.
Note that all valuation-related engagements should be performed by experienced, credentialed valuation analysts.
The key is not to go it alone. You’ve been immersed in running and growing your business, and obtaining proper valuation means enlisting an experienced, credentialed analyst. But they can offer more than just a number. A valuation analyst has the skills to dive deep into your operations and suggest steps that will maximize your price. These aren’t quick fixes. They often require a year or more of preparation to attract the best offer but are well worth the time and effort.
Even if you aren’t planning a sale in the short term, getting a proper valuation can be an important goal-setting strategy for growing your business. A valuation analyst can work with you to develop a blueprint to set you on the right path for one day getting the offer that you dream of.
After the years of hard work you put into building your business, getting an accurate valuation is the first step in ensuring you’re rewarded. Members of the National Association of Certified Valuators and Analysts (NACVA), Dembo Jones’ business valuation team has decades of experience assisting business owners with preparing their company for sale as well as ensuring a worry-free transaction that maximizes return. Contact us today.