13 May Why Everyone Needs a Business Valuation Before Selling
There are a lot of moving parts inherent in selling a business, especially as you pass through the due diligence process and get close to the close. The longest, most drawn-out discussions between buyers and sellers revolve around the value of the business being sold. This number is often always in the eye of the beholder and is more subjective than most business operators realize.
When you’re in B-school, professors take great details in teaching finance students about the in-and-outs of public betas and the importance of accuracy and large data-sets when performing valuations. Unfortunately, when performing private business valuations, such a luxury is unavailable. Lack of information creates a gulf between what is possible, what is likely and actually reality. Luckily ballpark estimates help owners determine what a business could be worth in the open market, but the lack of data can blur the numbers and confuse sellers and buyers alike.
Determine the Purpose of Your Valuation
There can be several reasons one would require a business valuation, the least of which is performing some type of M&A work. ESOPs, family/partner buyouts and SBA loans may all require some type of valuation on the company. But when it comes to fully selling all the shares and assets of the business, the valuation approach is very different, especially for a privately-held company that could easily be sold to a strategic buyer in a private auction. When such a valuation is performed the valuation expert will certainly want to find “true north,” so to speak, but the real value in such an assessment will be in what the valuator (if he/she has experience in the industry and knowledge of acquisitive firms) will peg on what you could ultimate nab in a strategic auction for the biz.
Often when the fair market can eek for your company is very different than the calculated fair market value of your business. Knowing the market helps to understand the ranges being paid for companies of a particular type and sector and ultimately what they could be worth according to the present strategic acquirers in the market.
Why Do you Need a Valuation?
First and foremost, a business valuation can help to set the expectation in the mind of the business seller. In so many instances, sellers are often unrealistic in what they think their businesses are worth. A good, expert third-party valuation can help bring the seller down out of the clouds. It can also help the seller to get a good financial plan in place with his CFP/wealth manager and tax planner long before a deal closure ever takes place to understand where the chips will fall, how the owner will be taxed and what the final principle take-home amount will be.
Secondly, it can help a business buyer who may be attempting to low-ball the seller and get an extremely good deal. A non-biased third party helps to bring both buyers and sellers together to get a deal done.
Finally, there may be an underlying legal reason to have a valuation, including a partial buyout by the management or employees.
Don’t Pick a Value
Valuations are often based on a reasonable range that could be expected for a business of similar type and size. Such ranges could be stated as 3x to 5x the last trailing twelve months of EBITDA or something similar. One thing that becomes dangerous when approaching potential buyers is to tell them “we are looking for $______for the company.” The real risk is that doing so can set a mental limit in the minds of buyers as to what the seller would be willing to do in the sales process. Some have other strategies, but the best method is to get the dog and pony show in play and see where the buyers are willing to go. Doing so can often exceed the expectations of even the most optimistic expectation in a strategic valuation of the company.
Obtaining a general idea of the value of the business before the time to sell arises can be an overlooked, but crucial step in the process of performing M&A.
For more information on the valuation services we provide, please visit http://businessvaluations.org.