Is A Business Valuation Really Necessary?
Business owners trying to sell their business will often ask why a valuation is so important. There are many reasons but the primary reason is money! The buyer and ultimately the buyers’ financing source(s) will want to verify the investment is sound. Here are a few more items to consider.
How do you get the best price? Hint: Make the best investment!
To ready a business for sale, many owners spend thousands of dollars fixing it up, but fail to put their financial statements in good order. For a timely and profitable sale, the most important factor is determining an accurate asking price. If priced too high, you get no takers. Too low, you will be giving it away and could be leaving thousands “on the table”. An accredited valuation establishes the price your buyer will accept. To produce the greatest gain, your best investment is a formal, written valuation, which presents your fiscal picture in its true light.
How do you win the buyers confidence?
In today’s fast changing market a successful sale is dependent on the buyers confidence in his prospective earnings. To close the sale, you will need a presentation that helps the buyer easily visualize cash flow. Common sense tells you: Trying to sell a business without a professional valuation is like trying to sell a home without an appraisal!
Why NOT use YOUR accountant?
Buyers expect to see an owner’s claim substantiated by clear, concise financial documentation. A financial statement constructed according to generally accepted accounting principals might not reflect the true economic benefit of owning a business. A typical financial statement will actually lower the estimate value of the business. After all, isn’t it your accountants’ job to LOWER your taxes, NOT raise your PROFITS to justify your selling price? Further, your accountant IS YOUR ACCOUNTANT! A proper valuation must come from a non-bias third party.
Shouldn’t you claim FAIR compensation?
If you want to ask the highest price possible and claim the real value of your businesses good name, using a balance sheet and profit and loss statement cannot justify fair compensation. Most privately held companies minimize profits to minimize taxes. Also, in your years of experience, most business report “paper” losses to minimize tax liability. Most businesses are valued for much MORE than what the “books” show they are worth. Influencing factors are; discretionary spending, depreciation, one-time expenditures and interest on notes that would be paid off after the sale.
Why recast the financial statements?
Public held companies maximize profits to maximize stock value. Your financial statements are recast as though you are a public company, presenting your profits in their best format. Next, values for your customer base, goodwill and years of hard work or “SWEAT EQUITY” are established using industry standards and norms. This will demonstrate the hidden value of the business and the advantage of being an entrepreneur rationally, objectively and best of all defensibly. A properly prepared business valuation presents an accurate picture of the overall financial health of the business.
What is the “Estimated Fair Market Value”?
This is the price a business would bring if it were effectively exposed for sale on the open market, for a reasonable amount of time, assuming an informed seller and informed buyer, neither of whom is acting under undue pressure nor compulsion. The valuation is the documentation, which separates your business from the others without one. It shows the owner is serious and can justify and prove the businesses asking price is “fair and reasonable”.
Jeff Slaton Sr Business Advisor
NetWorth Business Brokers
Agent BES Valuations and Appraisals
