A recent article in the New York Times, “Do You Know What Your Business is Worth? You Should,” reviewed the use of “online valuation calculators” as an inexpensive alternative to providing owners of small companies with a value for their business. These calculators provide formula-based approach to valuation cannot possibly address the subjective nature and “art” of valuations. There are multiple factors to be considered in an “opinion” of value, not the least of which is the purpose of the valuation and numerous subjective factors for which the judgment of an experienced business appraiser is necessary.
However, a more important take-away from this article is the importance of business valuations as a planning tool for the owners of closely-held businesses. As the article observes, most business owners don’t become concerned with a “business valuation” until a transfer of equity is involved, either through the acquisition of the interest of another shareholder — or the business itself. Here are some useful lessons regarding business owners and valuation:
• All owners should be aware of the valuation “drivers” for their business, whether it’s location, subscribers, contracts, volume, or financial measures such as net worth, revenues and cash flow.
• Owners are more likely to overvalue their business, particularly to financial buyers.
• Is it a business or a lifestyle? Many small, and even large, businesses have been operated to provide the owner with a comfortable lifestyle. If the business has been operated on a risk-averse basis to subsidize an owner’s lifestyle personal expenses, don’t expect to get paid for the company on its “high growth potential” and the added value a buyer will provide.
• If you’re planning to collect the cash and walk away, make sure you at least have a competent and experienced management team in place.
• Earn outs and contingent payments have become an important part of purchase consideration as buyers and sellers try to bridge a valuation gap.
• A bird in the hand is worth two in the bush. Small businesses are not readily marketable and that first offer may, in fact, be the best.
Which leads to …
• Time kills deals. Once a buyer has submitted a proposal and the parties are engaged in negotiating the purchase agreements, time becomes your enemy.
For most owners, issues arising from the valuation and sale of your business is a “once and only” experience. If you’ve been involved in the sale of a business, and have your own useful advice, including lessons learned the hard way, please leave a comment below.
Have questions? Evergreen’s team of business valuation professionals work with many of the region’s top attorneys and financial planners, providing their clients with the necessary business valuation support. We welcome confidential consultations – Give us a call today.