How To Make The Most Of Your Business Valuation (Even If You’re Not Ready To Sell)

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What is your company worth? It’s important to know your business valuation.

If you’ve put any thought into life after running your current business, you’ve likely given this question some consideration. But the real question is this: Is your own estimate accurate?

More than likely, it isn’t. Sure, no one knows your business better than you do. That doesn’t mean you understand the ins and outs of determining what someone else would pay for it. The factors that can influence a company’s value in the marketplace — whether making an initial public offering (IPO) or not — are far too numerous for an owner to see from deep within the weeds of running day-to-day operations.

Reaching the True Value

In my experience as a Certified Valuation Analyst (CVA), overly high expectations are incredibly common. Some owners see a few changes that could send profits soaring. Theses are things a new, well-capitalized owner could easily fix. Yet, they inflate the value of their companies. Unfortunately, this isn’t how the market works.

True value is much harder to pinpoint. It is sometimes far less entwined with immediate profit potential than you might think. In 2017, for example, 76 percent of companies that listed for an IPO were unprofitable the year prior to going public. In the end, it comes down to the financial or strategic value in the eyes of the investors. This is something that’s not easily discerned by the owner alone.

Verify Your Value

Clients who seek out my company for valuations are often shocked — both positively and negatively — by what they learn during the process. Just recently, I surprised a client because my assessment was nearly double what he was expecting to take home in a sale.

His assumption, like many others, was based on a simple review of earnings before interest, taxes, depreciation, and amortization (EBITDA). This equation is certainly valuable in a sale. It represents a basic assessment of a company’s free cash flow before certain expenses and financing activities that might not hold true under new ownership. However, it’s not the only factor.

Before we valued his business, he assumed that his low EBITDA wouldn’t result in much profit from a sale. He said he might as well close up shop and scrape up what money he could from his inventory and receivables. Little did he know that he’d be looking at a value based on EBITDA on top of keeping his cash, collecting accounts receivable, and getting paid for his inventory. Those additional pieces added $25 million to the $26 million value I had already assigned to his business alone.

The Need For Accuracy

All of that goes to show how critical an accurate valuation is for a potential seller. That owner is in a much better position than he would have been based on his own valuation.

Others have an even more pressing need for a clear picture. Many of our clients are nearing retirement and counting on the sale of their businesses to make those retirement plans possible. Whether they over- or underestimate the value of their businesses, the end result for their latter-day adventures could be vastly different from what they expect.

These two examples by no means represent the only instances when it’s important to seek a professional valuation. Many owners don’t have a clear picture of their businesses’ operating capital needs and how they might impact what buyers will pay. And others are selling in a market with little or no comparable sales.

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