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4 Business Valuation Considerations

April 25, 2017

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.

Be Transparent
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.

Prioritize Experience
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.

6 Surprising Benefits of a Company Valuation

March 27, 2017

Business owners often wait for a specific need to seek a company valuation. They may be ready to sell or raise capital, or a shareholder might be gifting equity to a family member or seeking to be bought out. A valuation can be valuable even if there is no immediate, specific need. Here are some big benefits that you might not have considered.

Planning for Retirement
You should seek a company valuation at least a few years prior to retiring from a business you own. A full valuation in anticipation of a sale or other transaction can help you better understand your options, and potentially even open up new options. Pre-retirement valuations are increasingly popular as Baby Boomers age. They want to explore their options, begin planning, and perhaps initiate the process of negotiating so that they know what retirement—and the business sale that accompanies it—will look like.

Planning for an Uncertain Future
You might not want to think about it, but the world is full of uncertainty, and a worst case scenario can wreck your business. Whether it’s the death of one of your co-owners, a vicious divorce, or a dispute between partners, a business valuation can arm you with information you need.

A valuation also offers your family some certainty if you suddenly die. Rather than wasting time on a valuation, your family can quickly decide what to do. Moreover, the value of your business can help you determine the right value for a life insurance policy, in addition to offering clear guidelines for the right business and other insurance values.

Tracking Growth
Shareholder agreements often contain provisions requiring regular valuations: this information helps owners and management keep up with the business’s changing value. This helps you assess how your business changes over time, and weigh how effectively various ownership strategies are functioning.

If you prefer to minimize costs and time, a valuation firm can annually calculate value based on predetermined procedures. This can be as simple as determining the current EBITDA multiple, then applying it to your business’s most recent EBIDTA stream. This helps owners see how the company is performing in light of market trends, but is a limited analysis, not a full appraisal.

Performing Better During Hard Times
No company is immune to market shifts. Understanding how these shifts can affect your company can insulate your business against the worst down swings. Businesses, for example, can be affected by the oil industry, even if they aren’t part of that industry. Some don’t want to know their value, for fear it will demoralize them. But this important information can help you capitalize on market swings. For example, down swings in the market are an ideal time to gift equity, thereby minimizing gift taxes.

Unveiling Weaknesses
No business wants to take a hard look at its weaknesses, but staring these weaknesses in the face can help you make intelligent business decisions. A valuation helps you assess risk and weigh performance. You’ll get a clear idea of the factors that drive value, offering you more control over your business’s value. AR turnover, customer concentration, leverage ratios, and working capital position can offer red flags to buyers, but may also undermine overall growth. A valuation alerts you to potential future problems, allowing you to avert catastrophe before you consider a sale.

Moving Beyond Gossip
We all hear gossip about other companies—and wonder why we can’t get the same values they do. A valuation expert looks at a company’s financial health and history to establish realistic sales numbers that are based neither on gossip or wishful thinking. Business owners contemplating an exit will find that a valuation can help them plan ahead.

A valuation firm ensures realistic expectations, helps you address possible weaknesses, and prevents your wishes from interfering with reality. Buyers always want to offer less than owners want. An independent appraisal by a business valuation expert helps both sides negotiate more reasonably. In so doing, both owners and buyers have a better chance of getting a fair deal that acknowledges a business’s strengths and shortcomings.

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