More than Just Earnings
Though business value is driven mainly by profitability, there are other factors that go into business valuation. A business valuation takes into account key value drivers as well as strengths and weaknesses of a company. A business valuation completed far in advance of a sale may give the business owner the opportunity to fix issues that decrease value.
Business Valuation and Its Importance in a Business Sale
A business valuation is useful in determining a realistic asking price. General rules of thumbs may be too high or too low. If the business seller’s expectation of value is too high, it will prolong the selling process until a price concession is made. If the asking price is too low, money could be left on the table.
A business valuation can also become a useful tool in negotiations. Buyers may do research and build up an arsenal of reasons to justify a lower offer than your asking price. Fully understanding the value of the business will assist during negotiations. Buyers hire accountants and attorneys to find ways to justify and negotiate a lower price. A low offer countered with a higher price supported by a third-party business valuation is hard for a buyer to combat. Business valuations take time to compile, so it is best to have one completed prior to a sale versus calling a “time-out” during negotiations. In most instances, you will not have the luxury of being able to put a business valuation together once negotiations have begun. A properly marketed and positioned business for sale opportunity will have this completed up front.
Other Reasons for a Business Valuation
The following list contains potential reasons to engage us for our business valuation services other than selling a business:
- Annual “business check-up” for business owners to determine financial strengths and weaknesses
- Benchmark comparison for business owners to determine how the business is operating compared to other similar businesses in the same industry (regionally and nationally)
- Business Planning and Value Enhancement - Determining the present fair market value of a business and setting goals over a period of time to increase that value
- Valuing company stock for the development or annual review of an employee stock option program (or bonus stock option plan)
- Retirement planning
- Merger or Acquisition
- Planning for an initial public offering of stock
- Conducting a major strategic-planning initiative
- Seeking outside investors
- Disputing conclusions of an IRS audit
- Doing estate or gift planning that involves company stock
- Creating a company stock-option plan or other benefit plans that involve company stock (such as ESOP)
- Breaking up a partnership (Partner Buyout)
- Entering Bankruptcy
- Getting a Divorce