The Value of a Valuation

By Scott Balfour

If you ask a business owner the value of their business, you get the funniest looks and comments. Some will come right out and say, “I have no idea.” I find this odd and a big mistake.

Think about it for a minute.  Small businesses are often the single largest asset of most business people. Most business owners are focused on increasing the value of their business.  Yet they have no benchmark as to where they are or goal as to where they want to be.

In corporate America, the value is easily obtained, monitored, and managed. The CEO simply needs to look at what their stock is trading for at any minute of the day.

The business owner often knows how much cash they have by checking their bank balances, the value of receivables from their accounting systems, the value of personal investments by checking on their portfolios.  They often have a rough idea of the value of their home because of real estate tax assessments and keeping an eye on what homes are selling for in their neighborhoods. To some extent, they may know the value of their commercial real estate using the same references.

With businesses, there are no quick easy references. There are many factors involved; tangible and intangible assets, fluctuations in performance, growth or decline, market dynamics, competition, loyalty, technology, relationships, innovation, goodwill, and more.

So, why is it a good idea to know the value of your business? The value of the business often makes up a sizable chunk of a business owner’s net worth. Knowing this is helpful for retirement planning. It is also valuable in assisting any investment decisions relative to the business. As previously mentioned, it is a valuable tool for management, for benchmarking, and as a tool to measure against.

The planning of an exit strategy – be it passing along to employees, family, or a sale to an acquirer from a third party.  It’s helpful in planning for financing and refinancing, valuable for the consideration of partners or investors. There are also some indirect reasons where a business valuation might be of value – estate planning and divorce/prenuptial agreement perhaps?

It’s easy to see why an occasional valuation or even one annually may be beneficial. Why do so few small business owners do this?  First, I think it’s because they don’t recognize the value of their business. As Goldilocks says about the bears’ porridge, “Not too hot, not too cold, but just right.” Or, as we say in the valuation process: “Not too high, not too low, but just right.” There is value to getting it “just right.”  Secondly, I think it’s about cost. It’s true that a 100-plus page appraisal that will stand up in court from an appraiser can be very expensive, but it very well might be worth it given the scope and purpose of the report. However, if you’re looking for something simpler, a BPO (Broker Price Opinion) to determine the most probable sales price from a Business Broker may be all you really need. Don’t wait – call us to get your own valuation done now!  Call 207-774-7715