Business Valuation: What is My Business Worth?
At some point your client will ask “What is my business worth?” and you’ll want to ensure she gets an accurate answer. Because some tax and estate planning needs to be done in preparation for the sale, you should encourage your client to have a formal business valuation done by an independent provider that has experience with M&A transactions.
It’s important to note that although a valuation is useful for planning purposes, it doesn’t necessarily represent the amount your client will actually receive in the open market. This is because market value depends on a number of factors, including:
- The desirability of the business and the industry, the degree of competitive advantage the business has within the industry, and the image or attractiveness of the business
- The terms and conditions of the deal, such as the amount of cash received or the requirements for owner involvement after the sale
- Buyer perception of value
- How well the sale is managed
In other words, the market tells us what a business is worth through the offers received from potential buyers.
The point of getting a business valuation early in succession planning is to give an accurate picture of the potential value of the business today. This ensures that your client has realistic expectations and can plan accordingly.
Your client might discover that the business value is lower than anticipated. This can be discouraging but if exit planning is started early enough, there is time to take steps to increase the value.
On the other hand, you might find out that the business value is high enough to allow your client to meet her financial objectives after the sale. In this case, remind your client that she may not receive any all-cash offers. Business owners often receive 60-75% of the price in cash along with an earn-out or a vendor take back. This fact should be taken into account when making plans.