Valuing a Business

Valuing a business is arguably the most important task a business broker does before taking an engagement to sell a business. And from the business owner’s standpoint, it is arguably the most important consideration when determining whether to sell or not.

But for most business owners, valuing a business presents a host of questions – not least being who does it and what should the final report contain?

I’ve spoken often about the importance of getting a business valued in advance of a sale but also for several other essential reasons. I’ve also posted on this blog several times (here and here) on why business owners should hire someone proficient in valuing a business.

But we still get questions about this very important aspect of what we do so let’s tackle these two specific issues: who to hire when valuing a business and what does the valuation report contain and conclude?

Valuing a Business: The Players

Rumor has it that valuing a business is a task that can be done by accountants, business brokers and investment bankers. But I use the qualifier “rumor has it” because that’s far too general a statement to be taken seriously.

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Of those three types of professionals, accountants are the least likely to be able to value a business if for no other reason than that such work is usually a very tiny percentage of their accounting practice and, as such, not something they’re focused on.

That is not to say that accountants don’t or can’t do proper valuations. Some of them can – especially larger firms, many of who have special departments for valuation work. In fact we’ve occasionally taken engagements to sell businesses that have been valued by accountants. But we ALWAYS do an in-house valuation to confirm the accountant’s result before we agree to such engagement.

With regard to the other two, depending on the business that needs to be valued, an investment banker may be overkill while a business broker may be quite inadequate; or the other way around.

The smaller and less complex the business, the best choice from a cost and experience standpoint would be a business broker.

For example, for a small manufacturer of cardboard shipping boxes with roughly $5 million in revenue, engaging an investment banker to value such a business would be an expensive and unnecessary overkill.

Likewise, hiring your everyday business broker to value an automotive parts distributor with physical operations in eight countries and with $37 million in sales conducted in multiple currencies might be “penny wise but pound foolish”. Doing so will probably be less expensive but my experience suggests that, though many would be able to market and sell the company, few business brokers have the training and experience to handle such a valuation assignment.

But between business brokers and investment bankers is a fourth group of accredited business appraisers. If we are approached to value a relatively simply $35 million business, we would do our customary valuation but probably call in an accredited business appraiser to give more heft, support and fire-power to our report.

A Word About Business Brokers

Sell a Business I have written previously that pretty much anyone with an overabundance of audacity can hang out a shingle stating that they’re business broker. Even in areas that require a business broker to be licensed, the license required is a real estate license – which, as long time readers of the journalistic tour de force know, I believe is about as logical as requiring a hair-dresser’s license to operate a lawn-care business.

But there is a cohort of business brokers that do have the training necessary to perform valid and comprehensive business valuations. The most obvious ones are those with the Certified Business Intermediary (CBI) designation but there are others, as well.

For instance, brokers that go through our course on becoming a business broker have the proper training and are certified as having completed that training.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.

Become a Professional Business Broker…

The key takeaway here is that properly-trained business brokers are likely the best choice for valuing businesses in the Main Street and Lower Middle Market segments.

Valuing a Business: The Report

A properly-prepared report, no matter who performs the valuation, will contain several elements regardless of the industry or business being valued. Each one of these elements is included in the report so that the report’s and author’s credibility can be established. This is an important consideration because a properly done valuation report can act as an excellent marketing tool.

Valuing a Business: The Cost

Some business owners equate business brokers with real estate agents and expect us to do a valuation at no cost. There is no instance whatsoever in which we will do that; not one.

What's a Business Worth If the business owner hired an accountant to do the job, the owner would never assume the accountant would do so for free. The same goes for the investment banker and the business appraiser. All get paid – and usually quite handsomely.

We are professionals – as they are – and have no need or desire to work with people that feel otherwise. If you’re a business broker – if you consider yourself to be a professional business broker – act like it. If you’re a business owner, consider a business valuation to be no different from any other product or service you want. It is likely worth what you pay for it.

The cost of valuing a business varies wildly and depends mostly on the complexity of the business and the amount of time it will take the broker, accountant, banker or appraiser to complete the work and produce the final report.

On the low end, $1,500 has been the minimum we’ve ever charged for the smallest and simplest of businesses. On the high end, a valuation can cost $25,000 or $30,000. In fact, I’ve known of several instances where the costs approached $50,000.

The Bottom Line

Bringing a business to market without valuing that business risks offering it at too high a price – in which case it is unlikely to sell – or too low a price – in which case the owners leave money on the table.

Professional business brokers have an obligation to get our client’s the best combination of price and terms when we take on an assignment to sell a business. We also have an obligation to get the business sold.

In order to fulfill both those responsibilities, both we and our selling clients must know the value of the business we’re being hired to sell and agree to the strategy we propose to get it sold.

Think of it this way.

If the broker properly values the business at $1.7 million but the business owner wants $2.5 million, both parties should know that the chances of a successful sale are remote at best. From the seller’s standpoint, he or she really doesn’t want to sell. From the broker’s standpoint, the chances of us getting paid for our time – let alone recouping our marketing costs – are about zero.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want 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

#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions

The author is the founder 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 jo*@Wo*******************.com

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Valuing a Business

Valuing a Business

Valuing a Business: The Cost

The Bottom Line

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