4 Business Valuation Considerations
Valuing your business is key to a successful exit. But even owners who aren’t planning a sale can benefit from knowing the value of their business. If you’ve never had a business valuation before, the process can feel intimidating. These four considerations can take the emotion and frustration out of the business valuation process.
Set Reasonable Expectations
Business owners know their company best, and often have a good idea of the business’s general value. However, they need the judgment and wisdom of an objective third party, since it’s impossible to know a business’s true value until you attempt a sale.
Business owners understand the value drivers of the business, but can struggle to be objective. The value you estimate might not take into account each variable. For example, owners may not consider market or other external factors.
A third party valuation offers confirmation of the business’s value from someone not involved in its daily operations. This type of valuation also incorporates adjustments for non-recurring and discretionary expenses, in addition to normalizing adjustments. This means that adjusted cash flow from a third party might be quite different from reported cash flow. Business owners often fail to incorporate these adjustments, producing a value estimation that differs substantially from that of an outside expert.
A good valuation expert will explain the methodology used to arrive at a business’s value. He or she also incorporates company and industry-specific data, looking at the business as a whole, including operations and non-operating assets.
No one wants to leak confidential, proprietary information. But an accurate, reasonable valuation demands transparency. The right valuation provider will still protect confidentiality.
A valuation expert can draw on experience with similar businesses, but will not have the same level of experience with your business. Thus you must disclose even seemingly unimportant information. Something as simple as leasing a property below market rate can affect value, making transparency key.
Transparency can also help reduce anxiety during a sale, since it’s less likely that unexpected negative information will impact the sale. The many documents you must complete and questions you must answer as part of a valuation can serve as helpful tests before a sale. Doing your due diligence helps you assess whether it’s the right time for a sale, in addition to gathering the information you’ll need anyway for the sale.
When planning a sale, not knowing business value can cause costly mistakes when obtaining financing, raising capital, applying for insurance, or agreeing to sales deals. With a known value, owners can highlight value drivers while streamlining performance and operations. This knowledge arms business owners with the information they need to manage new opportunities and potential offers.
Leave Emotions Out of It
Selling a business can be emotional, since many business owners are also the business’s founder. They’ve thrown themselves into the business for decades, and have strong emotional attachments to the company.
A valuation consultant’s role is to objectively analyze the economic value of your company. Don’t highlight the work you’ve put in, or what the business means to you. What matters most are hard figures and evidence-based economic forecasts.
Accurate valuations depend on having a consultant who understands your business. That means you need to find a qualified individual or team, with credentials or experience in your industry. Ask for references, and follow up with those references. Consultants learn from previous experiences, so experience relevant to your business is key.
An accredited, experienced consultant can help yo navigate the valuation process. That includes setting a reasonable time line and managing your expectations. The best consultants ensure that the final valuation comes neither as a shock nor as a source of displeasure.