Ask any business owner and they will tell you with pride how much their business is worth. However, many of these business valuations wildly overestimate what they could actually sell their company for.
How does this happen? In most cases, entrepreneurs are tied to an emotional value of their business. While this makes sense, (after all, they have toiled to build their company into what it is today), it is also a shame as failing to properly value their business could cause them to miss out on opportunities to sell.
Don’t let this happen to you. Here is the truth about business valuation.
Truth 1: You Shouldn’t Do It Yourself
While you might know the math, and it would save you money to value your business by yourself, the reality is that this is not something you should do. For starters, there is the emotional component which even private equity investors fall into when valuing the business for sale in their portfolios.
In addition, a valuation conducted yourself is less than impartial. This can lead to challenges when you have your business for sale and are in the negotiation stage, as the buyer likely will not trust your number and you are probably not going to trust their number. As such, you are better off using a broker to analyze your business and provide a valuation opinion.
Truth 2: There No One Number
Ask anyone involved with valuing businesses for a living and they will tell you that there is never one number. In fact, most business valuation opinions will be based on the average (or even weighted average) of multiple valuation methods.
Why does this happen? Valuation methods vary in approach and in their fit. As such, a method which might be valid for one situation might not be valid in another – for example, valuing a business in liquidation as a going concern.
Even when there is agreement on which approach to use, there can often be a difference of opinion in some of the details – these include adjustments made to multiples for size or location and even how to measure the impact of risk on a specific business.
As a business owner, all you need to know is that there is never one number, though there might be a certain approach which fit better than others.
Truth 3: It’s Only Really Worth What Someone Will Pay for It
Just because a business valuation by a broker, this doesn’t mean you will instantly resolve a disputed price tag with your potential buyer.
First, this is normal as buyers are constantly looking for the best deal and as such are more than happy to lowball you in negotiations.
Second, if you want to end-run this, then ask the buyer to agree to an independent valuation as part of their letter of intent. Doing so will bind the buyer to the price determined by a third-party and make it much harder to quibble over the price when it is time to close.
Truth 4: Confidence Matters
When markets are doing well, it is easier to ask a premium for your business. Additionally, if you have a strong growth plan and are well on your way to implementing it, you can also ask for more money. Don’t forget the bump you can get from having a new process or technology – even for a small business.
At the end of the day confidence matters, especially when you are trying to get the most for your business.
For more Business evaluation tips and to learn more about our services, contact Beal Business Brokers and Advisors today.