Why Business Valuations Are Growing In Popularity
Some business owners mistakenly think there is one Rule of Thumb to value their business. This is never true! For example, if you are a service business, someone may tell you the business is worth one years’ gross – but don’t for one moment think a business with three customers has the same value as one with 30, or even 300 customers. Is a radio station in a major market worth the same multiple of cash flow as one in a small town? Probably not. Are two dental practices in the same city, one with a famous, well-known leader worth the same multiple as a lesser known practice? Probably not.
Very few business owners know how much to expect from a business sale, how much to pay for an opportunity ahead, how to price a capital raise, or how to protect assets by knowing their value, even in these uncertain times.
Why do so many business buyers overpay? Because they don’t have an impartial professional telling them not to overpay! Why do so many business sellers have trouble selling their businesses? Because their advisors tell them to ask for too much! Why do some divorces ruin the business owning partner? And why high death taxes leave the heirs with so little of the estate? All for the same reason – unqualified individuals guessing at true values.
Here’s how to bolster your position at any bargaining table. And get what you deserve.
Remember, in most cases the value of your business will vary depending on the reason the appraisal is being performed.
For example, if you were selling your business, you might want to determine the fair market value of the business – what it would fetch on the open market. However, if you wanted to take in a partner, you would seek to determine what an equal or less than equal share is worth, and it’s not pure division.
Business owners often procrastinate in finding out the value of their business, mostly because they don’t know anyone with such knowledge or not want to suffer the expense. At the end of this book is a chart showing the various credentials for professional Business Appraisers, and you can find what you are looking for by conducting interviews for expertise and pricing.
Your Business – Passing the Baton
Did you know that only one third of family-owned businesses are passed successfully to the second generation and only one out of six reach the third generation? If you’d like to pass your business on to a family member it makes sense to start planning now. By determining what your business is worth, you can maximize the wealth you transfer to the next generation and minimize your business transfer cost. A business valuation will start you on the road to:
• Identifying your financial goals
• Analyzing the needs of family members
• Identify potential ownership and management successors (In some cases, it may be a good idea to hire non shareholder managers while the next generation develops its management skills.)
• Determining when succession should occur
• Determining what income you will need during retirement, how long you may need it and where the money will come from
• Deciding whether you want to:
Gift some or all of the business
Create an ESOP
Have an outright total or partial sale, or
Consider other capital markets alternatives
Often the best place to start is by working with a Business Valuation professional to determine the value of your business. Do you have concerns? Do you wish someone could highlight some of the issues?
When you assess the value of your business, your capabilities and needs become apparent and key opportunities for improvement surface.
While working on your Business Valuation, you may identify goals and critical success factors for your business, and measure how well your business is performing in key areas compared to other companies. This comparison, along with information gleaned from an analysis of your business, can develop a framework to focus attention to help you attain your business goals.
• In what direction should you take the company?
• What investments in technology should you make?
• How can you attract, retain and motivate your key employees?
• How can your business become more efficient?
Best of all, when you highlight improvement opportunities, you can use the Business Valuation to help close the identified gaps in the areas of:
• Lending assistance
• Capital garnering
• Goal setting
Written By Michael Gilburd (Part III Of Book Series)