4 November 2024: Purpose of a Business Valuation Pt 1
We’ve often discussed the importance of knowing what a business is worth when the time comes to sell. After all, a business owner telling us what they “want” or “need” for their business is meaningless. Nobody but the owner cares what they want. The question is, “what’s it worth“.
Some owners – especially those of smaller businesses – think they can but a price on their business and someone will come along and pay it. But “unrealistic price expectations” is one of the top three reasons businesses don’t sell when they first come to market.
Few business owners understand how to value their business and don’t realize that as accurate business valuation will, all other things being equal, determine if your business is sold within any reasonable amount of time.
WHAT WE’RE LOOKING FOR: Pallet and Packaging businesses. Specialty foods, staples; Healthcare, pharma equip. EBITDA: >US$2M; U.S., Canada
in**@Wo**********************.com
We do valuations all the time and always lead off the discussion with the statement that, “we’re generally the bearers of bad news.” Very often, our numbers are doubted (but never disputed). But “the market” can tell us what a business is worth. How? Because whatever business we or any other broker is working on is not the “first of its kind – the first restaurant, accounting practice, widget manufacturer or HVAC contractor – that has come to market. And finding out what those previous businesses sold for gives us a pretty good idea what buyers – “the market” – are likely to pay for similar businesses.
But owners knowing the value of their business is important for many other reasons than simply when it’s time to sell.
Knowing the economic value of a business or company is essential for various reasons and individuals, including the business’ owners, potential investors, creditors, insurers and potential buyers. Understanding the purpose of a business valuation is important, as it serves numerous strategic functions that can impact decision-making, financial planning, and overall business strategy.
In this, Part 1 of a two-part series, we look at five reasons it’s important for any business owner to understand, at all times, the approximate value of what in all likelihood, is their most valuable asset.
__________________________________________________________________________________
Are you a business owner? A Realtor? A business broker? Are you looking for a business to buy? Do you have questions about the selling or buying process, the valuation, marketing the business, deal structure, financing or some other business issue?
You can find the answers in The Brokers Roundtable℠. Join seasoned business brokers, commercial real estate experts, valuation specialists, financing professionals, attorneys, accountants and all the other talent associated with what we do.
Sign up for a 90-day test drive at The Brokers Roundtable℠. Access the talent – or just see what’s going on in our industry!
___________________________________________________________________________________
1) Mergers and Acquisitions: One of the primary purposes of a business valuation is to facilitate mergers and acquisitions (M&A) – the sale of the business. In such transactions, an accurate valuation is crucial for both buyers and sellers. Sellers need to know what their business is worth before bringing it to market; they want to ensure they receive a fair price for their business. Buyers need to ascertain that they are making a sound investment.
A detailed valuation helps identify the fair market value of the business, enabling negotiations that can lead to successful transactions. Without a reliable valuation, both parties might either undervalue or overpay for the business, leading to potential conflicts and dissatisfaction post-transaction.
2) Investment Decisions: For investors, understanding the value of a business is essential before making investment decisions. Whether investing in public companies or private ventures, having a clear picture of a company’s worth helps investors gauge potential returns and risks. Valuation models can analyze a company’s financial health, market position, and future growth prospects, aiding investors in determining whether to invest, hold, or divest their shares. If the business needs capital and the owners prefer to offer equity rather than take on debt, a professional valuation is mandatory.
3) Financing and Loans: Business valuations play a pivotal role in securing financing from banks or other financial institutions. Lenders typically require a business valuation to evaluate the collateral value of the business before approving loans. A solid valuation provides lenders with insights into the company’s financial stability and its ability to repay debt. It also helps in determining the terms of the loan, such as interest rates and repayment schedules. A strong valuation can enhance a company’s negotiating power, potentially leading to more favorable lending conditions.
4) Exit Strategy Planning: For business owners planning an exit strategy, whether through selling, merging, or passing the business on to heirs, a business valuation is crucial. Knowing the value of the business helps owners make informed decisions about the timing of the sale and the strategy to maximize their return.
A business valuation helps answer two of the most important exit strategy questions: 1) What will the net proceeds, after taxes, be? And; 2) Will that amount be sufficient to support the post-closing lifestyle the owner has planned?
It also assists in identifying potential buyers and determining what terms to negotiate. Furthermore, a well-documented valuation can make the business more attractive to buyers, as it demonstrates a level of professionalism and preparedness that enhances buyer confidence.
5) Internal Management Decisions: Business valuations are not only important for external stakeholders but also play a vital role in internal management. Business owners can use valuation as a tool for strategic planning, performance measurement, and operational improvements.
__________________________________________________________________________________
Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
By regularly assessing the company’s value, management can identify trends, set benchmarks, and develop strategies that enhance overall performance. Knowing their business’ value can also help owners make informed decisions about resource allocation, expansion plans, and operational efficiencies.
The Bottom Line
Their business is almost always its owner’s most valuable asset. Given this fact, it’s always surprising to us how few owners know what their biggest asset is worth.
Next week, we’ll look at six more reasons for a business valuation and the purposes those reasons serve.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
.
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.
Joe
Searching For…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively.
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents
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 600 in the world. He can be reached at
jo*@Wo*******************.com