What is the value of my business?
Questions answered in the post: How does Business Valuation for Merger and Acquisition and Business Sale Purposes work? What about business valuation for succession planning and exit strategies? What is the likely sales price of my business? How do I determine an asking price for my business sale?
The first question most business owners ask me is “what is the value of my business?” It does not matter if the business is a construction company, a plumbing service company, an engineering firm, manufacturer, business services retail or other. The answer is the same.
In simple terms, the value of the business is the sum of all the benefits that accrue to the owner during and after ownership. Clearly, many of the benefits of owning a business are not income related. Most business owners have a pride of ownership beyond their income and they appreciate the challenges and flexibility that come from owning their own business.
Valuations are done for many reasons: for estate and tax purposes, in divorce settlements, to resolve disputes between partners, to name a few. Sometimes they are needed to prepare for a market sale. Every valuation takes the uncertainty that is part of business into account. There are numerous assumptions that can radically change the final valuation figure or range. Often whether the valuator wants to find a high or a low figure in the range of possible valuations will greatly determine the outcome. This is why divorcing spouses can have such radically varying valuations for the same business.
When you are anticipating selling your business you should obtain a valuation to plan appropriately and, in some cases, to use as a negotiating tool. For smaller businesses your broker should be able to prepare a simple valuation. For larger businesses it is worth having a valuation properly pared by a valuation professional. This person may be independent, work with your accountant or be part of the broker’s firm.
Greg’s Tip: Have both a valuation for business sale purposes and a business analysis (a business improvement strategic plan) performed for the purpose of maximizing your sales value and after tax returns. Ideally this will be performed 3 to 5 years before a sale. While it may seem extravagant, this investment will produce the highest internal rate of return of any investment you make.
Explaining a detailed valuation is beyond the scope of this blog. Technically, a valuation involves either determining that past cash flows fully reflect the future, or projecting out the future cash flows based on past history and likely forecasts, and then discounting this cash flow to find the present value.
Over the next month or so we will add postings giving rules of thumb and other simplified valuation techniques that may assist you in estimating your business value. Just a word of caution, do not go to market based on rules of thumb and estimates. Have a proper valuation done appropriate for your size and type of business.