By Maurie Cashman
“How much is my business worth?” For many owners, the answer to this one question determines their ability and eagerness to leave their companies. Once we have established your ownership transition objectives, this is the next critical question to be answered.
Take James Mee, the owner of Greenhouse Supply Company, as an example.
James had been ready to sell his company for several years – but he felt it was worth little more than its net asset value – his industry’s rule of thumb when valuing his type of company. While that value was not trivial ($3 million), James wanted more. So, he continued to work in the business well past the point where he found it to be either fulfilling or energizing. In doing so, James committed a serious but common ownership mistake: working after the fun and challenge are gone on the mistaken assumption that the company can’t be transferred for adequate value.
Because James failed to get a proper and professional business valuation, he failed to realize that his business could have been sold for significantly more money than his industry’s “rule of thumb.” He was approached by a buyer that expressed interest in buying his company. At that point he came to us to do a certified valuation. We valued the Company at nearly $23 million. The offer came in at slightly over $14 million. By having a solid valuation in hand they were able to negotiate the offer significantly higher. In the end he may have either sold the Company for far less than it was worth or potentially missing the opportunity to negotiate a satisfactory price, resulting in not selling it at all, ending up working far longer than he wanted.
How can you help to avoid James Mee’s predicament?
Many business owners believe the value of their business is net profit, or gross sales, multiplied by an industry rule of thumb. This is simply not the case. In fact, the application of an industry rule of thumb formula often results in a value determination that differs greatly from the actual value that could be determined by a CVA.
How Can a Certified Valuation Analyst Help You?
Accurate Value Determination
The result of an inaccurate value determination, regardless of whether it is high or low, generally leads to undesirable consequences. For instance, if the value is too high, estate taxes will be too high; savvy investors or prospective buyers will usually disregard a value that appears too high. If the value is too low, you can be sure savvy investors or prospective buyers will recognize it and take advantage. Likewise, if you are on the other side of the dispute in a dissenting shareholder action or divorce, you certainly want to know you are receiving an accurate value for your interest.
Determining the true value of a business enterprise requires a careful analysis of two primary components that make up value: tangible assets such as real estate, machinery, and furniture used by the business; and various intangible assets such as business or personal goodwill. Intangible assets might also include customer lists, trademarks, copyrights, distribution rights, a superior management team, non-compete agreements, physical location, special processes, and name recognition.
Understanding the Business
To properly value a business enterprise, the CVA must acquire a thorough understanding of every aspect of a company’s dynamics, including: management capabilities, company strengths, weaknesses and vulnerabilities, the competitive environment, overall expectations for the marketplace, and future economic prospects for the industry and the economy in the region and as a whole. All of these elements affect the risk of ownership in a particular enterprise, and risk directly impacts value. Additionally, the valuator must analyze the inherent financial health of the enterprise and its future profit potential.
Sorting Through a Complex Process
After a thorough analysis of all the company’s dynamics and its financial health, the CVA must select the most appropriate methodology from among the many accepted by the valuation industry, and apply a series of calculations and formulas to arrive at the ultimate conclusion of value. Overall, the process is highly complex and requires a significant amount of time. Indeed, this is what is required to determine the true economic value of a privately owned business enterprise, and this is what a CVA brings to your table.
If you are considering the transition of ownership of your business, you need a thorough professional valuation which includes a marketability component: Can your company be sold today at its appraised value?
An experienced valuation professional active in today’s merger and acquisition marketplace can give you an accurate answer to that question.
An accurate answer can tell you if your business is as ready to be sold as you are ready to leave it.
In James Mee’s case he hired a certified valuation analyst whose thorough valuation included what the business would be worth in today’s mergers and acquisitions market.
Why is a valuation necessary in this early stage of your Exit Planning? Simply because you and your financial and tax advisors must be able to determine if your financial objective can be met by a sale or other transfer of your company, to whom and when. Only a current business valuation can supply this vital information. Remember it takes both a strong company and a strong market to maximize business value.
The results of valuation work can also lead to developing internal valuation formulas used in updating transfer prices in buy-sell agreements.
Bottom Line: If you can realize your financial and other objectives today based on the current value and marketability of your business in today’s market, why delay your exit? For many owners, the answer to one question determines their eagerness and ability to leave their companies: “How much is my business worth?” This question is indeed critical and we can help you answer it.
© 2017 Aspen Grove Investments, Inc.