Business Owners: 5 Reasons to Get a Valuation
6 June 2022: Business Owners: 5 Reasons to Get a Valuation
Are you a business owner? If so, do you have any idea what your business is worth?
Based on our more than two decades of advising business owners, I doubt it. And if you don’t, what would you do if someone showed up and said “I want to buy your business?”
You think that’s a bit far-fetched? It’s not. It happened to me back in the 1990s and that experience is one reason I started Worldwide Business Brokers. That event also informed a series of six posts entitled “Selling a Business When It’s Not for Sale“ that was published early this year.
But that’s only one of many reasons that you should have a good idea what your business is worth. Here are five more.
Knowing what your business is worth is the FIRST step in a selling process that can be arduous and time consuming. And if you try to sell your business without knowing its value, you’re destined for a long and most likely unsuccessful and deeply disappointing experience – or you’ll end up selling at a discount thereby leaving money on the table.
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You need a clear, objective, disinterested party’s assessment of the fair market value of your business as it’s currently structured and operating. Knowing it’s value will, with the assistance of a professional business broker, help you establish a reasonable asking price which will have two fabulous follow-on effects.
The first is that having a professional valuation will minimize, if not eliminate low-ball offers and small caliber dickering over price with legitimate buyers. Second, it will help your buyer’s lender get to “YES!”
And speaking of lenders, I don’t know of any growing business that doesn’t, at some point, need financing. Whether you want to expand your facilities, modernize your equipment, add a new product line or capitalize on a sudden opportunity, the value of your business will probably be the most critical factor a lender will take into account when considering your request for funding.
And valuations don’t happen overnight. Any professional valuation takes time; for research, analysis, corroboration and documentation. If you walk into to your lender’s office, outline a fabulous opportunity that you need a quick million to take advantage of and your lender asks for the most recent valuation of your business, you don’t want to say, “I’ll get back to you on that.”
You can kiss that opportunity au revoir.
Buying Out Your “Best Friend”
Partnerships never last forever – and often dissolve more quickly than any of the partners ever imagined. And the more partners in the business, the more opportunity for discord.
Smart business owners who are/have partners, know that the time to discuss a valuation is not when arguments are raging out of control. At that point, the likelihood of agreeing on even the simplest valuation question – who should do it – is about the same as Nancy Pelosi and Donald Trump sitting down together for tea.
REALTORS! Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Don’t Miss Out on the Coming “Silver Tsunami”!
Partnerships go into the toilet with uncomfortable regularity. Having a recent valuation – and a pre-agreed method of updating it – along with a partnership agreement that describes how one partner can exit, will remove one of the most contentious aspects of the dissolution of that partnership. It may not make the day-to-day work environment any more pleasant but it will at least give all parties the comfort that the end is near and the balance of the journey is pre-programmed.
Given that more than half of all marriages don’t make it past the fourth inning, one might surmise that more than half of all businesses will be impacted by one.
We do business valuations for divorces all the time. We’re constantly getting calls from attorneys representing this or that party in what is quickly turning into a geographically truncated version of a world war.
Even if your spouse is not a partner in your business, knowing what it’s worth will allow you to quickly understand what the impact of the divorce will be and how to plan for it (to the extent planning is possible). And, as a side benefit, it will also reduce legal fees.
TIP: Business brokers who have read to this point might consider taking a divorce attorney to lunch.
We are too often on conference calls with attorneys representing both sides. This is among the least pleasant aspects of what we do.
What happens to a business when the owner – or, more pertinently, one of the owners – dies?
First let me say that to answer that question would require several posts. But for the purposes of this post, let’s stick with valuation issues.
Does the business carry enough insurance to allow either an orderly wind-down of the business or the time to sell it at its fair market value? How would you know if your don’t even know what it’s worth?
And if you left your spouse and kids holding such an empty bag, my guess is that your spouse would be wondering why they didn’t pursue the previous topic.
We did annual valuations for a client that had four owners – partners, all of whom worked in the business. Tragedy struck when one partner was killed.
The business was growing rapidly. If the owners had not agreed early on to carry life insurance on each of their respective lives – and to get it updated every year to reflect the current value of their business – the surviving owners would have to either dig deeply into their personal pockets to buy out the deceased partner’s heirs or welcome a whole family of new “partners” into the next management meeting.
The Bottom Line
It’s hard for me to overstate the importance of knowing what your business is worth.
After more than 20 years advising business owners on all the aspects above, I’m still surprised at how few owners have any realistic idea what their business is actually worth. (Many, of course, have wildly unrealistic ideas, but that’s a topic for another day.)
Do you go to the doctor to get regular checkups on your health? It’s just as important to get regular checkups on the health of your business.
There are more reasons why the owner(s) of a business should know what their business is worth and maybe I’ll do a future post to expand on this topic. But knowing what your business is worth – how healthy it is – will eliminate an untold amount of angst and aggravation should you ever be visited by any of the situations above – and you’re SURE to be visited by at least one of them.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Well-capitalized buying group seeking U.S.-based multi-unit businesses – including franchised businesses – with Discretionary Earnings of between $2 million and $20 million. Channels of focus include pet services, travel & leisure, fitness and home services.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com