I often get the question “I am thinking about selling my business, can you tell me what my business is worth?”
My answer almost always starts with advising a potential seller to have a professional business valuation or assessment done. A quality business valuation is a vital tool that serves as the foundation for establishing a realistic selling price. Adhering to proven methods and strategies will help maximize overall value in any situation involving a merger, acquisition, employee buy-out, strategic partnership or joint venture.
The Importance of a Business Valuation
A professional business valuation offers many benefits, and most business owners recognize the primary objective of establishing a legitimate price. Once a seller is engaged with a potential buyer the due diligence process can be complex and lengthy. Without a thorough documentation of the company’s financial history and future prospects, the owner may be compelled to accept a lower offer than necessary.
There are several important reasons why a comprehensive valuation is indispensable
- Identifying Key Value Drivers: Digging down into the organization’s internals can help expose key structural weakness and identify hidden issues prior to engaging in the selling process. This gives you time to correct problem areas before you put the business up for sale.
- Establish a Realistic Selling Price: Everyone wants to secure the best possible price for their business. Unfortunately, many owners rely on advice from colleagues, general rule-of-thumb methods and other equally unreliable formulas. An unrealistic selling price can be frustrating and prolong the process. When the price is too low, the owner is essentially giving away a portion of their hard earned equity. The only way to determine a realistic selling price for your business is to create an accurate valuation.
- Negotiation Advantages: When you want to sell your business, a documented valuation will provide a solid and reliable foundation for negotiating from a position of strength. Most buyers are experienced and sophisticated, so you should expect a rigorous analysis that focuses on every aspect of your company. Many buyers utilize agents that specialize in purchasing businesses, so they’ll look to highlight deficiencies and minimize the worth of the company whenever possible. A sound valuation provides the critical evidence that supports your asking price.
- Buyers Focus on Cash Flow: Most buyers will focus primarily on cash flow as a measure of business value, so it’s important to highlight your revenue stream and document the regularity and size of your cash flow. A professional valuation includes income statements, financials and an ability to demonstrate how current results can be replicated in the coming years.
A professional valuation is essential in the business sale process. In all likelihood, you’ll be dealing with seasoned buyers who are very knowledgeable of the business acquisition process. To level the playing field, it’s important to give yourself every advantage, and that begins with creating a professional business valuation assessment.