Preparing for Sale: 5 Realities of Business Valuation

Often, business owners approach a valuation with a mix of excitement and anxiety. Will the valuation go well? Will the results match expectations?

Before the process starts, though, a reality check may be in order. It’s wise to keep in mind these five realities of business valuation:

1. The Value Won’t Match the Number in Your Head

It never does. Many entrepreneurs can’t help but consider the company their “baby.” They have poured their hearts and souls into the business. Because they have such an emotional investment in the outcome, these owners can be disappointed by valuation results that they deem too low.

On the flip side, other owners may be unaware of their company’s market position, its unique value drivers or its potential. These owners are pleasantly surprised at their higher-than-expected valuation results.

2. Rules of Thumb Aren’t Really Rules

CEOs say the darndest things. “That company sold for 1.5 times sales.” “That company sold for five times EBITDA.” “Companies in this industry sell for seven or eight times (insert metric here).”

Don’t put too much stock into broad statements like these. No two companies are alike, and owners and executives often stretch the truth when it comes to the sale price. Instead, keep an open mind. The valuation process will identify the strengths and weaknesses of your particular business. Many factors impact value, from the depth of your management team to the state of your plant. If your company is an industry leader, you may land ahead of whatever rule of thumb you’ve heard. If your company is lagging, you will have a lower-than-average valuation.

3. Value Is in the Eyes of the Buyer

You can’t ask the question “What’s it worth?” without adding the qualifier “to whom?” Different buyers are willing to pay different prices. For example, strategic buyers will be interested in buying a company that has synergies with their existing businesses. Because of this motivation, strategic buyers may be willing to pay more than other types of buyers.

On the other hand, financial buyers (like private equity firms, for example) will be looking for companies they consider to be undervalued but scalable. These buyers are not sentimental — their goal is to make money, so they’re looking for a bargain.

4. The Past Is the Past

Valuations are forward-looking. As such, they are based on estimated future cash flows, not past performance. So even if your company has had a stellar past few years, that doesn’t mean the years ahead will be equally bright.

For example, technology consumers are notoriously fickle. What was popular in terms of computing, personal communication or entertainment two years ago may already be obsolete. Conversely, organic foods and green energy may be even more popular in the future than they are today. A valuation will illuminate such market risks and opportunities.

5. A Valuation Is Worth the Cost

Do you really need a professional business valuation when selling your business? In almost every case, the answer is “yes.” A buyer will want a credible, unbiased, professional valuation before investing in the company. In the case of a divorce or shareholder dispute, you’ll need a valuation that can stand up in court. And if it’s a tax matter, the IRS will require a professional valuation.

With this in mind, be sure to hire a credentialed, experienced valuation analyst. He or she has studied valuation techniques and principles and has passed national exams to demonstrate a certain level of technical expertise.

If you are concerned about the value of your company, consider the steps you can take to increase value now. Contact us to help you get your company in the best shape for valuation, as well as talk you through the valuation process.