Valuing your business is a key part of the exit process, but it can also be a helpful exercise for non-transactional owners seeking to determine what their business is worth in today’s market.
If you’ve never had your business valued before, it can seem like a daunting and emotional task. We spoke with Scott Brace, Managing Director of Empire Valuation Consultants and an Accredited Senior Appraiser (ASA), to learn more about the key considerations for business owners.
1. Manage your expectations.
“Business owners have been running their companies for a long time, and often have an idea as to a general valuation range for their business” says Brace. “While they may have some expectation for a range of value, they really need to have an objective third party indication of value that will support their planning or sale process.”
According to Brace, “While I may have some idea what my home is worth, I don’t really know its true value until I try to sell it or have a real estate appraisal prepared. The same is true of a business.” A valuation helps business owners understand the real value of their company.
As the founder or owner, you have an innate understanding of the value drivers that exist within your business, but may have difficulty maintaining an objective view. Be mindful that the value you’ve estimated may not take into consideration all possible variables. For example, Brace says that Empire Valuation Consultants takes into account a variety of other factors in addition to historical business performance.
One significant benefit of a third party valuation is determining that the value drivers can be confirmed by someone not involved with the company on a day to day basis. Additionally, there are a number of valuation adjustments that may be incorporated for discretionary items, non-recurring items, and normalizing adjustments. As a result, adjusted (normalized) cash flow for a business may appear very different from reported cash flow. Many business owners don’t include these adjustments, and their own estimation of value can be substantially different from a third party valuation.
“Before we deliver our preliminary conclusion of value, we first explain to our client the methodology employed and approach to valuation,” says Brace. “We utilize the company’s results (as adjusted) and company-specific data but also incorporate objective market data and industry benchmarks. We look at the entire business enterprise including value derived from operations as well as non-operating assets.”
2. Prepare to be transparent.
It is perfectly reasonable for you to be protective of your business and its private information. A fair and accurate valuation requires transparency but still maintains the confidentiality of your business valuation and work files.
While your valuation consultant can draw on their experiences with similar businesses, he or she may not have the same level of expertise with your company. That’s why it’s critical to disclose even seemingly unimportant details. “Things like the lease rate for a property not being at a market rate will impact the valuation, so it’s crucial that there be a level of transparency from the owner into what’s driving value for the business,” says Brace.
Exposing your business in the valuation phase will also help lessen the anxiety when a future sale process occurs. “Due diligence is rigorous. Owners are expected to answer numerous questions, analyze operations and provide the financial statements and legal documents required for the valuation,” says Brace. The valuation process can be a helpful test run before a deal. “When it’s actually time to sell, the due diligence material will already be gathered and in good order,” he says.
Not knowing the value of their businesses can lead owners to make mistakes when raising capital, obtaining financing and adequate insurance or selling the company. If the value of the business is known, owners can focus on key value drivers and improve operations and performance. Having this knowledge prepares business owners for potential offers or opportunities that may arise.
3. Put emotions aside.
“There is definitely an emotional aspect to selling a business,” says Brace. “Many of the business owners we work with are the original founders. They have put all of their time and energy into building the business into what it is today, and after 30 or 40 years, they have a vested interest in the company continuing on in their stead.”
While it may be tempting to emphasize the work that’s gone into the business throughout the years, it’s important to recognize that the consultant’s job is to analyze your company through an economic lens. Be sure to highlight items that can be supported by numbers and facts, such as reports on sales, productivity and market share.
4. Look for experience.
While some tend to think of valuation services as a commodity, the final number is dependent on how well the consultant (or team of consultants) understands your business. It’s in your best interest to find a qualified firm with the proper business valuation credentials and experience in, or a demonstrated capacity to learn about, your industry.
“We tend to provide three to five references to any potential client,” says Brace. “We are responsible for explaining financial trends, industry expectations, relevant transactions and market data, as well as other factors that may affect valuation to the business owner. So we find that our past experience is impactful with each new client we serve.”
An accredited and experienced consultant will guide you through the valuation process in a sophisticated manner, including managing your expectations and timeline. “If navigated properly, the final valuation shouldn’t be a complete surprise to the business owner,” says Brace.